Morningstar Solutions
ETF Solutions
Using ETFs for Portfolio Construction
Slide 2: Using ETFs for Portfolio Construction
Asset allocation is one of the most important decisions that you make as an investor. Having the right mix of stocks, bonds, cash, and commodities in your portfolio, and being well diversified within each asset class, can have a profound impact of your returns. ETFs can be an easy way to gain this diversification. They can be cheap, flexible, and tax-efficient and may help you gain access to sectors and asset classes that would otherwise be closed off to individual investors.
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Slide 3: Using ETFs for Portfolio Construction
The first step in building an ETF portfolio is to figure out the right asset allocation. A good place to start is the Morningstar Premium Asset Allocator tool. Here you can manipulate your theoretical exposure to cash, bonds, large-cap stocks, medium/small-cap stocks, and foreign stocks. In general, investors with a long time horizon should consider a more aggressive approach weighted heavily toward equities, while people within a few years of needing their money should stick to more conservative investments. After making your decisions, the tool can tell you the chance that you will be able to meet your financial goals given how much money you already have invested and how much additional money you intend to invest monthly.
Slide 4: Using ETFs for Portfolio Construction
If you want to see the asset allocation of your current investments, enter your holdings into Morningstar's Portfolio Manager. From here you can run the Premium X-Ray tool, which will reveal your current allocation and show you how your holdings are distributed among stock sectors (such as health care or media), stock types (like high yield and slow growth), and across countries.
Slide 5: Using ETFs for Portfolio Construction

Armed with your asset allocation decisions, you can use Morningstar's ETF, Fund, and Stock screeners to discover which securities will help you achieve your goals.

For core stock exposure, many investors could be well served by ETFs. There are several inexpensive, broad market ETFs that track major large-cap indexes, like the S&P 500. This can be a very cheap way to gain exposure to the broad market, but investors who are dollar-cost averaging (regularly investing small amounts over time) should carefully watch broker fees that may be incurred when buying ETFs, as they may push the overall costs of the investment over that of a traditional index mutual fund.

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Slide 6: Using ETFs for Portfolio Construction
Morningstar's ETF analysts have created a picks list containing some of their  favorite ETFs for long-term portfolio builders. When selecting ETF Picks, Morningstar analysts consider factors such as expenses, index construction, tax efficiency, and diversification. Morningstar.com Premium Members can access the list by  clicking here. If you're not a Premium Member, you can take a free 14-day trial to access our ETF Picks list, as well as all of our other Premium benefits, including our ETF Research Reports (now covering more than 350 ETFs),  Mutual Fund Analyst Picks, our  Asset Allocator tool, and much more.
Slide 7: Using ETFs for Portfolio Construction
ETFs can help you gain outsized exposure to undervalued areas of the market. Oftentimes, the short-term gyrations of the market leave certain sectors and subsectors trading for less than their intrinsic worth. To find these cheap sectors, we aggregate the 2,000-plus stocks rated by our equity analysts and come up with fair value estimates for hundreds of equity ETFs. Using sector ETFs in combination with your core holdings could help boost your returns over time, as we anticipate that undervalued sectors will, in the long run, converge to our estimate of their worth. However, it is important to note that there is a fair amount of uncertainty surrounding our estimate of what shares are worth, so investors should seek a margin of safety before investing. That is to say, only buy undervalued sectors when they are trading far enough below fair value to provide a cushion should the estimate prove too rosy.
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Slide 8: Using ETFs for Portfolio Construction
Another important role that ETFs can play in your portfolio is to provide access to alternative asset classes like commodities and currencies. These areas, which used to be available only to institutional investors and high-net worth individuals, can help further diversify your portfolio. Although most investors would want these asset classes to represent only a tiny fraction of their overall holdings, their presence in a portfolio can be helpful because they can be uncorrelated to broader stock market returns.
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Using ETFs for Portfolio Construction
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