Skip to Content
US Videos

Investing Insights: Tech Stocks and Lower-Risk Foreign Funds

On this week's podcast, picks for upstream energy stocks, T.Rowe Price large-cap funds, and tax efficiency of different fund types.

Editor's note: We are presenting Morningstar's Investing Insights podcast here. You can subscribe for free on iTunes.


Abhinav Davuluri: Intel remains one of our top picks in the technology sector despite several headwinds faced in the near term. In addition to U.S.-China tensions that have impacted much of the semiconductor space, Intel has also been dealing with a resurgent AMD that is now more competitive than it's been in the prior decade. For context, Intel currently sits at a dominant market share position across the PC and server processor markets.

However, AMD’s recent launches in the desktop and server markets on a more advanced 7-nanometer process technology have caused the market to extrapolate significant market share gains for AMD at Intel’s expense, with both stocks reacting accordingly. We do not dismiss Intel’s own manufacturing issues, and we do forecast share gains for AMD in the near term. However, we challenge the current sentiment that Intel will be unable to provide a competitive response. Intel’s equivalent 10-nanometer parts for laptops will launch later this year, while their server parts will be out in 2020, which we think will help mitigate share loss.

Intensified competition is a positive for the industry, and we believe the environment will bring out the best of Intel. Our fair value estimate is $65 for wide-moat Intel, and shares look very attractive at current levels, while our fair value estimate for no-moat AMD is $19, and we see shares of the latter as overvalued.


Christine Benz: Hi, I'm Christine Benz for Morningstar. Investors have gravitated to exchange-traded funds for a variety of reasons, including tax efficiency. Joining me to share some research on the tax efficiency of various fund types is Ben Johnson. He's director of global ETF research for Morningstar.

Ben, thank you so much for being here.

Ben Johnson: Thanks for having me, Christine.

Benz: Ben, let's talk about what we're talking about when we talk about tax efficiency. If I own a taxable account, it's just how much of a tax drag is on that account on an ongoing basis?

Johnson: That's exactly right. So, you can you can think of tax cost as just another headwind that is pressing against investors as they're trying to march down the path toward meeting their goals. And in the context of a taxable account, tax costs are real. They can be meaningful, and I think are most readily and most easily measured by our tax-cost ratio, which you can think of as almost an expense ratio of sorts. It's the levy that's taken by the taxman at the end of the day from your investment returns, which is inclusive of both taxes on normal income distributions, as well as capital gains distributions.

Benz: Okay. So, if I own a fund in a taxable account, that's where I'm concerned about tax efficiency, if I've got my holdings in an IRA or something like that, no need to worry about that?

Johnson: Exactly.

Benz: Okay. So, let's discuss the headline findings. You compared traditional passively managed funds, traditional actively managed funds, ETFs that are passively managed, as well as the smaller subset of actively managed ETFs. And you're looking at tax efficiency among those four wrappers…

Johnson: That's right.

Benz: …that someone might use. What were the headline conclusions?

Johnson: Well, what we see is that tax efficiency is really dependent on a number of different variables. One of those variables is just the turnover of the strategy in question irrespective of whether it's delivered through an open-ended mutual fund structure or an exchange-traded fund. So, lower turnover tends to lead to less potential for distributing taxable capital gains. If there's less regular buying and selling, there's less that's going to be unlocked as it pertains to cap gains distributions. So, lower turnover strategies of all types distributed across all vehicles will, all else equal, tend to be more tax-efficient versus their higher turnover peers.

Now, that said, you can't consider these variables in a vacuum. There are a number of other ones to take into account as well. Chief amongst those has to do with just the behavior of investors around you in the fund. Are they regularly coming and going, which itself can lead to higher or lower turnover? And ultimately, what we've seen is that even in the case of some very low turnover index mutual funds, which have witnessed massive outflows, there's no sheltering yourself from the negative externalities of the behavior of those around you, which might not necessarily be bad behavior, they might just be redeeming because they've saved, they've invested, they've met their goals, and now they have to take that money off the table to fund their retirement, for example. But that leads to, again, these negative consequences for ongoing shareholders in the fund.

So, in the case of open-end funds, we've seen a number of instances where very low turnover index mutual funds, that have been plagued by outflows, have distributed enormous taxable capital gains to their investors. Hopefully, many of those investors are not investing in those funds in a taxable setting.

Benz: The traditional index funds that have been making those big distributions, those aren't the big widely held index funds, correct?

Johnson: No, absolutely not. So, these large taxable cap gains distributions have been centered around much smaller funds, funds that have been plagued by outflows in recent years in the midst of a bull market. What we've seen amongst the larger, more widely held index funds is that they've been unaffected--generally because they've been in net inflows during that same period.

Benz: Okay. So, it sounds like one conclusion is, if I have a taxable account, and I'm trying to manage it for optimal tax efficiency, I should favor the ETF, even over the traditional index mutual fund, even though the latter have been pretty tax-efficient themselves. Let's talk about kind of the structural advantages that you think will continue to accrue good tax efficiency to ETFs versus traditional index funds.

Johnson: So, the structural advantage that ETFs have over open-ended mutual funds is, in some ways, I would say, a misnomer because many of the mechanics in the background are available to managers, sponsors of open-ended mutual funds. They just tend to use one specific route to meeting redemptions less relative to ETFs. And that has to do with the way that money specifically leaves the fund. So, ETFs benefit from an in-kind creation and redemption mechanism, which involves bringing stocks or bonds wholesale into the portfolio, and depositing in that portfolio, creating new ETF shares to be bought and sold on the secondary market. And the reverse of that process, when there are too many shares, when the supply of shares trading on the stock exchange is in excess of the demand for those shares. When that happens, shares are destroyed by removing those securities from the portfolio and delivering them out in kind. There's no actual sale. There's no cap gains that will be realized in most instances.

Now, mutual funds have that same ability, but shares of mutual funds are sort of dealt in a direct transaction between the investor and the fund company. So, mutual funds have in the past done in-kind redemptions. But they can tend to really only do it in a specific size. So, typically, the minimum is $250,000. And there are a few investors who are going to want to have to deal with--

Benz: Right--

Johnson: --liquidating that portfolio--

Benz: Of securities--

Johnson: --A few thousand securities in the case of some broad-based index funds on their own. So, ETFs, because those shares trade in the secondary market tend to make far more regular use of their ability to redeem in-kind than do traditional mutual funds. And that really is the linchpin of their tax efficiency, the ability to lift securities out wholesale, not actually transact in them, which might involve unlocking some embedded gains.

Benz: Okay. So, we focused mainly on equity funds in this conversation. How about fixed-income investments? Am I better off choosing the bond ETF versus, say, the bond index fund or certainly the actively managed bond fund?

Johnson: Well, I'll say the answer is, it depends.

Benz: Okay.

Johnson: Because first and foremost, not all bond index funds are created equal, not all bond ETFs are created equal. And in some cases--notably, the case of Vanguard--the bond ETF is a share class of the bond mutual fund. So, the tax consequences are shared across investors in all share classes of that fund.

What you will see, generally speaking, is still that ability to lift bonds wholesale out of the portfolio when there is the demand for turnover in the portfolio. Does lend itself to a degree of incremental tax efficiency, the advantages is less pronounced. And one of the key factors that that drives turnover really has to do with the makeup of the underlying index, issuance patterns in that underlying marketplace, certain factors which might not necessarily be able to be sort of immunized or shielded using that mechanism in the same way that it's more readily used and has been used very successfully among equity funds.

Benz: Okay. Ben, really interesting research. Thank you so much for being here.


Christine Benz: Hi, I'm Christine Benz for Widows and widowers have a number of options when it comes to claiming Social Security benefits. Joining me to discuss that topic is InvestmentNews contributing editor Mary Beth Franklin. 

Mary Beth, thank you so much for being here. 

Mary Beth Franklin: Thanks for inviting me, Christine.

Benz: Important topic here: the options that are available to surviving spouses when their partner pre-deceases them. Let's start by talking about how long you have to make a decision about what you're doing, what type of benefit you're claiming.

Franklin: Well, let's assume husband and wife are currently married and the husband dies. What are you entitled to and when? Of course, it depends on the circumstance. Let's say, I am a working woman with retirement benefit of my own, I've not yet claimed, and my husband died without claiming benefits. Now, I have a choice. I can choose to collect my own retirement benefits and survivor benefits later or vice versa. Survivor benefits are available as early as age 60, but they're permanently reduced if I claim them early compared to my full retirement age of 66. My retirement benefits are available as early as 62, reduced benefits versus full at my full retirement age.

I would say, if I am a woman with a significant retirement benefit of my own, I may want to claim my survivor benefit first. It's worth the maximum amount if I claim it at my full retirement age. But it doesn't get any bigger. It doesn't grow by 8% a year.

Benz: In contrast with your own benefits.

Franklin: Correct. My own retirement benefit is going to grow by 8% a year. For someone who has a substantial retirement benefit of their own, they may want to collect their survivor benefit at their full retirement age, collect that for four years, and at 70 if their own retirement benefit is larger, because at that point it would have earned four years of delayed retirement credits--

Benz: Right. Which can be really, really valuable.

Franklin: --Exactly. Then you would switch. Well, let's say, we have a different situation. Maybe a stay-at-home spouse who has maybe a spotty work history of her own. And she's not working right now, husband dies, she probably needs money. In that case, her survivor benefit is probably going to be the bigger benefit of the two. But we want to maximize that. So, we want her to wait until her full retirement age to get that. In the meantime, let's say, she's 62. She could collect her own reduced retirement benefit now …

Benz: On her own work history.

Franklin: On her own work history. And even though it would be permanently reduced, her retirement benefit, if she waits till her full retirement age to switch to survivor benefits, it will not reduce her survivor benefit. So, she could collect her own reduced retirement benefits first up to her full retirement age, and then switch to full survivor benefits. Now, a survivor benefit is worth 100% of what my late husband was either collecting at the time of his death or entitled to when he died if he died before claiming.

Benz: So, lots of different variables in the mix. Where do you recommend that people get more information? I know that you've certainly written so much on this topic. But for people who want to try to find some customized guidance based on their own situation, where would you recommend that they go?

Franklin: I would say start with the Social Security website, which is And in the search box, put widow or survivor and you'll come up with several, believe it or not, easy to read brochures that do lay out the different circumstances and when you might want to claim. And other things to keep in mind; if you're a young widow with young children, maybe you're below age 60; if your husband has died and you are caring for his children, and they are under age 16, you as the caregiving spouse regardless of your age may be eligible for survivor benefits.

Benz: The children as well?

Franklin: Children will get them up until age 18. You will get them up until the youngest child turns 16. Now, the thing to keep in mind for all of this is, if you continue to work and have earned income from a job, then your ability to claim any type of Social Security benefit before your full retirement age may be limited.

Benz: Let's talk about divorced spouses, divorced ex-spouses, where the ex-partner pre-deceases someone. What are the options available regarding Social Security claiming strategies at that situation?

Franklin: This is so important for divorced spouses to realize, that if they were married at least 10 years, divorced, and in most cases, currently single, they may be able to collect survivor benefits on their ex. A lot of people falsely assume that when they got divorced, they gave up their right to their mates' survivor benefits. That's completely untrue. You cannot give up your rights to a survivor benefit. So, if your ex dies, just as if you're still married, you're entitled to a survivor benefit. If you collect it at your full retirement age, it's worth 100% of what he or she was collecting or entitled to collect at time of death. So, very important. 

And the reason I want people to be aware of this is about a year ago, the Social Security Administration's inspector general's office, which is an internal audit, did a random survey of the type of advice that Social Security representatives were given what they call a "dually entitled beneficiary," someone who had a retirement benefit, and also a survivor benefit. That report found that in 82% of the cases, the Social Security rep gave the wrong advice. So, you want to make sure, particularly if you're entitled to two benefits, to know that you may be able to collect a survivor benefit first, and switch to your bigger retirement benefit later. Or in different circumstances, collect your own reduced retirement benefit first, and full survivor benefits later.

Benz: Mary Beth, let's talk about why this is really important for women especially.

Franklin: This is critical for women because here's the sad statistics. Seventy percent of married women will be widowed. The average age of a widow is 59 years old, which is pretty surprising--we think of the 85-year-old widow.

Benz: Exactly. No, that's young.

Franklin: And this may be, depending on the couple's financial planning, it might be the only source of guaranteed income for the rest of her life that she will ever get. So, it's extremely important for married women to be aware of what their potential Social Security benefit will be, whether they are married at the time of their husband's death or divorced when their ex-spouse dies. 

And I do joke that while a married woman is going to know pretty soon what her options are through Social Security, an ex-spouse wouldn't. So, you might want to stalk the ex on Facebook just to find out if he's still around.

One other point. If I am collecting a Social Security benefit at the time my husband dies and any part of my benefit is based on his earnings record because he was the bigger earner, if he dies, my existing Social Security benefit is automatically going to convert to a survivor benefit. But if I am not yet claiming Social Security benefits and my husband dies, I'm going to have to claim that benefit. And that's where I have the situation, I may be able to choose which benefit to claim.

Benz: You can make that decision. You are a font of wisdom on this topic. Thank you so much for being here, Mary Beth.

Franklin: Thank you for giving me a soapbox.

Benz: Thanks for watching. I'm Christine Benz for


Christine Benz: Hi, I'm Christine Benz for How can investors maintain global exposure while also keeping a lid on risk? Joining me to share some strategies for doing that is Morningstar analyst Dan Sotiroff.

Dan, thank you so much for being here.

Daniel Sotiroff: Hey, Christine.

Benz: Dan, let's talk about foreign stock investing, because even though the risks aren't notably higher than investing in U.S. stocks, there are some things that can add to volatility.

Sotiroff: Sure.

Benz: Let's talk about some ways to maintain globally diversified equity portfolios, but take the edge off a little bit. One you say is just a very basic strategy, which is--

Sotiroff: --Very trivial, very simple, anybody can do this, and lots of fund managers provide the means to do, is just get rid of emerging markets. Very volatile markets in general. They don't have the mature legal systems that the U.S. or a lot of Europe and Japan have. They have unstable governments. All these things sort of add up. This is just par for the course. This is what these stocks kind of look like. They're going to trade; they're going to be very volatile. Just avoid them in general.

Benz: You may though leave some return potential on the cutting-room floor. So, it's a trade-off. It's not--

Sotiroff: And the other thing I always point out to people is, these are 10% of the global market cap. Yeah, you're missing out on some opportunity there maybe. But if you're looking at sort of a global market-capitalization portfolio that you're putting together yourself, you're not missing out on a huge amount. So, yeah, they could add a little bit to your return, but maybe it's okay to give that up just to be on a little bit of a safe side.

Benz: One fund you like in that space is Vanguard FTSE Developed Markets. This is an index fund or an ETF depending on what you choose.

Sotiroff: Yeah, it's an index fund. You have the mutual fund option of the ETF share class that Vanguard offers through that sort of dual share-class structure that they have. One of the broadest, most diversified funds in the category, excellent management overall, super low fees, very tax-efficient. You really can't go wrong with it no matter which way you look at it.

Benz: Another idea is to take a look at a product that actively hedges its foreign currency risk, because--you tell me, but I think one of the major sources of volatility for foreign stock funds does tend to be those currency fluctuations.

Sotiroff: Excess volatility, we should say. Because it does add an extra layer of risk, volatility, whatever you want to call it there. An easy way to do that, it's a very mechanical process, is you have managers that essentially try to replicate the index and they will use some forward contracts to essentially lock in their forward interest--or excuse me--exchange rate and hedge out the impact of currency fluctuations. So, it's a very standard process, nothing really magical there.

The one caveat with these strategies is they do tend to charge more for the hedging feature. So, you're going to see the expense ratios be a little higher. They're still cheap within the category. They're still much cheaper than a lot of the actively managed funds out there. So, still pretty good bet from a fee perspective.

The other thing I would point out is, because they're using forward contracts to hedge out the foreign-exchange risk, it's a less tax-efficient vehicle. So, that's one thing to keep in mind with these things is, they do tend to throw off capital gain distributions, and there is some tax complexity associated with that. But all in all, they're very solid strategies, and they're very effective at what they do.

Benz: And they've gotten cheaper and therefore more attractive.

Sotiroff: And they've gotten cheaper, yeah, exactly.

Benz: One you like there, and there are a few that we like, but iShares Currency Hedged MSCI ETF, ticker HEFA.

Sotiroff: Correct. Yeah. That one goes after the EAFE Index, so foreign developed market stocks, Europe, Japan, Australia, the Far East. So, pretty standard index. Again, like I said, very standard process for hedging out currency, and it's very well-executed. So, it's a pretty solid choice.

Benz: The last strategy to consider if you are trying to lower the risk of your foreign stock portfolio would be to consider some sort of a low-volatility product. Let's talk about what these are. There are lots of ETFs that do so called low-vol strategies. What is that?

Sotiroff: So, essentially, what they're doing is they're trying to reduce the risk of owning equities in general. That's kind of a very broad mandate, like you said. There's different ways you can do that. Some of them just go after low-risk stocks. So, those types of strategies you're going to see, they tend to load up on things like utilities, consumer staples, maybe some real estate, depending on what the market is like from here, and they're just traditionally very stable industries, very stable stocks. That's one way you can do it.

Some strategies go a step further and they look at the correlations across stocks and they try to sort of optimize the weightings and the stocks that they choose based on those correlations to further reduce volatility. It's a very, you know, I don't want to say straightforward process, but it's got sound fundamental basis than a lot of modern portfolio theory out there. And it's very effective at what it does.

Benz: And here, again, this is a group of funds where, because of the entrance of a lot of ETFs and index funds in this space, we've seen cost pressure on this strategy.

Sotiroff: Exactly. That's the one nice thing about them is they've become very cheap over the past couple years. You're paying maybe 15 to 20 basis points for some of these strategies, depending on the specific market that you're going after. So, completely reasonable, very cheap way to play these markets.

Benz: One thing I've been hearing just very recently is that people think that maybe that low-volatility trade is a little bit crowded. Is that something people should consider themselves…?

Sotiroff: Yeah, I've heard that too. It's hard to say. Some people think that, but the thing is, is when stocks get expensive, that's when low-volatility is really what you should be owning, because it's usually a harbinger for a drawdown in the markets, which is when these products really shine.

Benz: Right.

Sotiroff: That's when they really show up and perform very well. Along sort of with the low-risk mandate, generally, what they tend to do is they tend to do better during drawdowns. They'll decline, just not as much as the broader market, I should say.

Benz: And among the funds that you and the team like in this area, the low-volatility area is iShares Edge MSCI Min Vol EAFE ETF.

Sotiroff: So, that's one of those--again, kind of, going back to what I was saying before, what they really do in that fund is they look for stocks that have low volatility, but then they'll also sort of fold in this correlation component. So, they will look for stocks that have low correlations with each other. So, if you're looking at the individual holdings in that fund, you may see some, like, very volatile mining companies that pop up every now and then. Again, that's more of a play on the correlations. The objective here is reducing the volatility of the overall portfolio.

The other advantage that fund has is it really maintains diversification very well. So, they limit the percent of assets that can be allocated to a single stock and they also control their sector weighting. So, they're not going to be heavily biased like utilities, the consumer staples, you know, these traditionally stable sectors…

Benz: Right.

Sotiroff: So, it's a very good play from that perspective. Like we were saying before, very low cost. 20 basis points for this fund. It's a very solid option to get access to stocks, but with less risk.

Benz: Lots of food for thought here. Dan, thank you so much for being here.

Sotiroff: You're very welcome. Thank you.

Benz: Thanks for watching. I'm Christine Benz for


Dave Meats: Upstream energy stocks have seen sharp declines in the last couple of weeks, and many are now trading in attractive territory. Sentiment has turned sour on the sector, which has shown extreme volatility recently. These stocks are highly correlated to oil prices, and WTI crude has fluctuated from a high of $76 to a low of $43 in the last year alone. The negativity was exacerbated by the announcement by President Trump that the U.S. will further escalate the Sino-U.S. trade war by adding 10% tariffs to another $300 million dollars worth of U.S. imports from China, which means all Chinese imports will now face import duties. In retaliation, the Chinese government allowed the renminbi exchange rate to slip below 7 for the first time since 2008, making U.S. imports and dollar-denominated crude more expensive in China. But the market's getting carried away. In total, the U.S. will be taxing $600 billion worth of Chinese imports, which is still a small fraction of global trade, valued at least $17 trillion. So, while there is still scope for further downside, we think the impact on global GDP, and indirectly on crude demand, will be modest based on the actions announced to date.

Likewise, the negative reaction to Concho Resources' earnings release also looks overdone. The firm reported weak well results from a 23-well project, testing narrow well spacing. So the test was a failure, but the solution is easy: The firm can revert back to the wider spacing it was using before. At that wider spacing level, we still see multiple decades of low-cost inventory for Concho in the Permian Basin, where it operates. Nevertheless, the slump in shares was severe and contagious--almost every other U.S. shale firm saw a steep decline at the same time. We think this creates a buying opportunity for our favorite low-cost, narrow-moat-rated shale producers. In particular, we highlight Diamondback Energy, ticker FANG, and Continental Resources, ticker CLR. Both have a strong cost advantage due to their high-quality shale acreage, and neither is likely to run out of Tier 1 inventory in the next 10 years.


Katie Reichart: T. Rowe Price offers a variety of large-cap funds that have proven their worth over time. All the large-cap funds Morningstar rates from T. Rowe are Medalists. T. Rowe is best known for its large-growth offerings, and there is a lot of overlap in portfolios between the different funds because the managers rely on the same central analyst team, but there are some subtle differences. The most established is T. Rowe Price Blue Chip Growth, which Larry Puglia launched in 1993. It's also the most diversified with 120 to 140 holdings. Two other large-cap, large-growth funds have managers with shorter tenures and slightly slimmer portfolios, at around 70 to 90 stocks. Joe Fath has run T. Rowe Price Growth Stock since 2014, and that fund invests in some private companies, such as Airbnb. Justin White has run T. Rowe Price New America Growth since 2016, and that fund has smaller bets on Amazon and Facebook than its two previously mentioned siblings. It also has a smaller asset base, so it can be a little bit more flexible. Then there's T. Rowe Price Spectrum Growth, which is a combination of 13 underlying funds across the complex, ranging from small cap to large cap, and it also has some international exposure. So, that can make it look a bit out of step relative to its category peers. On the value side, T. Rowe Price Equity Income is the oldest fund from T. Rowe, and John Linehan has effectively done a nice job with his dual objectives of income and capital appreciation. T. Rowe Price values a more straightforward relative value approach that has had a little bit of a higher turnover. On the blend side, T. Rowe Price Dividend Growth is a clear choice. Tom Huber has effectively run it since 2000, and it's had a nice, steady risk/reward profile over time. And then T. Rowe Price Growth & Income is another good choice that relies heavily on the analysts' input. Overall, T. Rowe Price's stock-picking has really set its large-cap funds apart, even in an environment where a lot of large-cap managers have struggled.