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Morningstar, Inc. Commentaries


Digging Deeper When Measuring Diversification
Apr. 05, 2017 - Morningstar, Inc. -  Even concentrated funds can be diversified.

How Can You Boost Your Base Rate When Searching for Winning Funds?
Mar. 29, 2017 - Morningstar, Inc. -  Morningstar's Active/Passive Barometer is a novel way of measuring one's odds of picking a winner.

Are Factor Investors Getting Paid to Take on Industry Risk?
Mar. 15, 2017 - Morningstar, Inc. -  Industry tilts appear to pay off for momentum but are not integral to the success of value and low-volatility strategies.

Will Actively Managed ETPs Meet Their Potential?
Mar. 08, 2017 - Morningstar, Inc. -  Several fund companies have submitted proposals with the SEC to launch actively managed ETPs that skirt daily portfolio transparency.

Morningstar's 5 Favorite Foreign-Stock ETFs
Feb. 24, 2017 - Morningstar, Inc. -  These are some of our favorite exchange-traded funds for investors seeking to add or augment their portfolio's international-stock exposure.

Not the Time for a Muni Run
Feb. 22, 2017 - Morningstar, Inc. -  Municipal bonds are still standing on firm fundamental ground.

A Low-Cost Way to Make a Diversified Bet on Energy Stocks
Feb. 17, 2017 - Morningstar, Inc. -  Energy Select Sector SPDR ETF bundles energy stocks from the S&P 500 for a low fee.

Strategy and Structure Make ETFs Tax Efficient
Feb. 15, 2017 - Morningstar, Inc. -  ETFs can be a good choice for tax-sensitive investors, but remember they aren’t tax-exempt.

Broad Muni-Bond Exposure at a Modest Fee
Jan. 20, 2017 - Morningstar, Inc. -  This ETF is a solid option for comprehensive exposure to the investment-grade municipal-bond market.

Sustainability-Focused Funds Garner Positive Flows in 2016
Jan. 19, 2017 - Morningstar, Inc. -  Parnassus Funds gained assets last year. Plus, new options make it easier to build SRI portfolios.

Consider Hedging Your Global Bond Currency Risk
Jan. 18, 2017 - Morningstar, Inc. -  Long-term investors haven't historically been rewarded for taking on currency risk.

2016 Shows That Factors Are Fickle
Jan. 11, 2017 - MoneyShow -  Last year demonstrated that diversification and discipline are required to put factors to good use.

The Best and Worst New ETFs of 2016
Dec. 28, 2016 - Morningstar, Inc. -  Among the many new launches, there were plenty of lumps of coal and a few diamonds to be found.

3 Factors Driving ETF Capital Gains Tax Bills
Dec. 21, 2016 - Morningstar, Inc. -  The strengthening dollar in 2016 means that currency hedging is once again the tax villain for ETF investors.

Morningstar's Top Picks for Inflation Protection
Dec. 07, 2016 - Morningstar, Inc. -  Surveying the fund and ETF landscape, from direct hedges like TIPS to indirect inflation-fighting plays such as floating rate loans and commodities.

When It Comes to Diversification, Don't Be Naive
Dec. 07, 2016 - Morningstar, Inc. -  The straightforward nature of equal-weighting has some appeal, but diversification isn't that simple.

Is Private Company Ownership a Risk for Mutual Funds?
Dec. 05, 2016 - Morningstar, Inc. -  A recent Morningstar study shows most funds tread lightly in private-firm investments.

WisdomTree Working to Balance Its Growth
Dec. 01, 2016 - Morningstar, Inc. -  It's no secret that the popularity of the exchange-traded fund structure has risen tremendously. ETF assets measured $2.4 trillion at the end of October 2016 and have grown by nearly 20% annually from $400 billion in assets just 10 years prior. 

Are Dividend Funds Overvalued?
Nov. 30, 2016 - Morningstar, Inc. -  Despite their popularity, the average dividend-focused fund isn’t trading at a premium relative to the broad market.

The ETF Investor Reaction to the Election in 9 Charts
Nov. 25, 2016 - Morningstar, Inc. -  The ripples of investors reassessing U.S. government policy could be seen clearly among exchange-traded funds.

A Smoother (But Still Bumpy) Emerging Markets Ride
Nov. 23, 2016 - Morningstar, Inc. -  Low-volatility emerging-markets ETF can reduce risk and still provide diversification benefits investors seek.

Vanguard Inflation-Protected Securities Is a Top Pick
Nov. 20, 2016 - Morningstar, Inc. -  Vanguard Inflation-Protected Securities is an excellent choice for investors looking for a pure-play inflation hedge. Its fees are among the lowest for open-end mutual funds and exchange-traded funds; it has excellent long-term performance; and it benefits from Vanguard’s strong stewardship. For these reasons, it earns a Morningstar Analyst Rating of Gold. 

The Trouble with TIPS (and Some Workarounds)
Nov. 20, 2016 - Morningstar, Inc. -  After languishing at below-normal levels for the better part of a decade, worries over inflation have flared over the past week following the election results. As Morningstar director of economic analysis Bob Johnson noted in this video, an increase in infrastructure spending, accompanied by tax cuts and decreased regulation, all of which President-elect Donald Trump put forth as economic prescriptions in the run-up to the election, could stoke inflationary pressures. 

Bargain-Hunting: Finding Value With Index Funds
Nov. 16, 2016 - Morningstar, Inc. -  How aggressively a fund pursues value is an important consideration.

Index Funds and ETFs: Tax-Efficient, But Not Always
Nov. 10, 2016 - Morningstar, Inc. -  JP Morgan Equity Index fund (OGEAX), an S&P 500 index tracker, is estimating a 9% capital gains distribution in 2016, following on the heels of an even larger distribution in 2015. That's no doubt an unwelcome development for investors who had been counseled to use broad-market index funds in their taxable accounts, but it shouldn't come as a complete surprise. 

5 Tips For Trading ETFs
Nov. 02, 2016 - Morningstar, Inc. -  Some investors gloss over the "ET" in ETF, failing to understand or appreciate what these two letters stand for and the implications of investing in a fund that trades like a stock. The exchange-traded nature of these funds is increasingly taken for granted as many of the largest ETFs trade at tight spreads in very narrow bands around their net asset values through most market conditions. 

These 3 ETFs Are Top Options in Their Categories
Nov. 02, 2016 - Morningstar, Inc. -  We highlight three exchange-traded funds that are best-of-breed, and one that falls short relative to peers.

Introducing the Morningstar Analyst Rating for ETFs
Nov. 01, 2016 - Morningstar, Inc. -  On Nov. 1, 2016, we unveiled Morningstar Analyst Ratings for more than 250 exchange-traded funds listed around the world, including 100-plus U.S.-listed funds. While this first batch of rated ETFs already accounts for a big portion of the global ETF market--more than $1.75 trillion in assets worldwide as of the end of September--we expect to assign Analyst Ratings to dozens more ETFs in the months ahead.

Rising Valuations Driving Down the Yield of This Utilities ETF
Oct. 28, 2016 - Morningstar, Inc. -  The utilities sector has historically been an income oasis, but demand from income-hungry investors is sending yields lower.

Fickle Investors Have Missed Out on This ETF's Momentum Strategy
Oct. 26, 2016 - Morningstar, Inc. -  Momentum is not a factor for the faint of heart.

Modest Style Bets, Modest Price
Oct. 21, 2016 - Morningstar, Inc. -  This multifactor ETF won't shoot the lights out, but it has a good chance to slightly outperform the S&P 500 over the long term.

Economic Growth: Great for Everyone but Investors?
Oct. 19, 2016 - Morningstar, Inc. -  While it may be intuitive to presume strong economic growth translates into strong stock market performance, the evidence suggests otherwise.

The Number of Strategic-Beta ETPs Continues to Mushroom
Sep. 28, 2016 - Morningstar, Inc. -  New funds are coming to market at a record pace, complexity is on the rise, and fees are under pressure.

Avoid Leveraged and Inverse ETFs
Sep. 14, 2016 - Morningstar, Inc. -  They're only meant to be a one-day holding, and during that period you're just guessing.

Playing Favorites With Multifactor ETFs
Sep. 07, 2016 - Morningstar, Inc. -  Playing favorites here is difficult given that each of these strategies is designed to deliver somewhat different outcomes.

AllianceBernstein, Karl Marx, and Index Investing
Sep. 02, 2016 - Morningstar, Inc. -  A colorful mix, but not very informative.

How ETFs Are Incorporating Sustainability
Sep. 01, 2016 - Morningstar, Inc. -  A spate of recent launches has given sustainable investors a greater range of diversified choices within the U.S. ETP universe.

ETFs That Take Some of the Volatility Out of Foreign Stocks
Aug. 31, 2016 - Morningstar, Inc. -  Currency-hedging and low-volatility approaches might make it easier to stick with international stocks over the long haul.

One-Stop Shopping for Exposure to International Stocks
Aug. 26, 2016 - Morningstar, Inc. -  This iShares’ ETF has appeal, but investors don't have to go much further afield to find more-compelling options.

Be Mindful of Rich Valuations in Low-Volatility Stocks
Aug. 24, 2016 - Morningstar, Inc. -  For the year to date, the top-ranked equity exchange-traded fund by net new inflows is  iShares Edge MSCI Minimum Volatility USA (USMV). The fund vacuumed up $6.7 billion in net new investor capital during the first seven months of the year. 


Quality at a Low Cost
Aug. 19, 2016 - Morningstar, Inc. -  Good companies don't always make good investments, but they may offer attractive returns relative to the market over the long term when they are trading at reasonable valuations, as they are now. Investors can get low-cost exposure to quality stocks through  iShares Edge MSCI USA Quality Factor (QUAL) (0.15% expense ratio).

Most Investors Probably Won't Outperform This Simple Portfolio
Aug. 17, 2016 - Morningstar, Inc. -  Investing can seem like a daunting task. But low-cost index funds make it easy for investors to do better than they would with most professionally managed offerings, after fees. A broad-market index reflects the collective portfolio of all market participants and their view on the value of its holdings.

The Case for Multifactor ETFs
Aug. 10, 2016 - Morningstar, Inc. -  The case for multifactor exchange-traded funds is straightforward. It is in essence identical to the case for diversification, which Nobel Prize-winning economist Harry Markowitz has described as the only "free lunch" in investing. Implementation is simple: Don't put all your "eggs" in one factor.

Better Bond ETFs?
Aug. 03, 2016 - Morningstar, Inc. -  A new crop of rules-based bond ETFs is attempting to improve on traditional market-cap-weighted alternatives.

High-Quality Dividends for a Slim Fee
Jul. 30, 2016 - Morningstar, Inc. -  Schwab US Dividend targets steady dividend-payers and is the least expensive dividend-oriented ETF available.

These 5 'Old-Fangled' Investment Options May Do Just As Well as Newer Alternatives
Jul. 28, 2016 - Morningstar, Inc. -  Don't dismiss traditional index funds, static-allocation funds, or traditional IRAs, among others, without careful consideration.

Navigating ETF Premiums and Discounts
Jul. 27, 2016 - Morningstar, Inc. -  What is net asset value? Why does it matter? And how can you ensure that you are buying and selling ETFs at a fair price?

10 Under-the-Radar and Up-and-Coming Funds
Jul. 26, 2016 - Morningstar, Inc. -  We added an exchange-traded fund for the first time to Morningstar Prospects earlier this year. ETFs have always been eligible for the list of up-and-coming or under-the-radar investment strategies that Morningstar Manager Research thinks might be worthy of full coverage someday.

Making Contrarian Investing Work
Jul. 20, 2016 - Morningstar, Inc. -  Performance tends to persist in the short run, but betting on long-term losers can be a winning strategy.

A Dividend ETF That’s Giving Our Longtime Favorites a Run for Their Money
Jul. 15, 2016 - Morningstar, Inc. -  There's a lot to like about this fund—save for its relatively steep price.

Index Construction Matters
Jul. 13, 2016 - Morningstar, Inc. -  Parsing the details of index methodologies is central to understanding the processes of index funds and ETFs and informs our overall assessment of these funds' investment merit.

An ETF for Growing Appetites
Jul. 08, 2016 - Morningstar, Inc. -  Long-term growth in global food consumption should benefit this fund's holdings, but investors should be prepared for a bumpy ride.

Unintended Biases in ESG Index Funds
Jul. 06, 2016 - Morningstar, Inc. -  ESG index strategies can be effective tools for values-based investing, but they may introduce some additional bets that investors may not intend to make.

Tax Planning Tips and Fund Picks: A Q&A With Morningstar's Christine Benz
Jul. 04, 2016 - Morningstar, Inc. -  Morningstar's Christine Benz discusses reducing the drag of taxes on a portfolio and shares some of her favorite mutual funds.

Anatomy of a Dud ETF
Jul. 01, 2016 - Morningstar, Inc. -  A few simple checks can help investors avoid funds that are destined for the dustbin of history.

Big Changes in Store for the Biggest Financial Sector ETF
Jun. 29, 2016 - Morningstar, Inc. -  Financial Select Sector SPDR ETF will be paying a special dividend as it adapts to reflect changes to its benchmark index.

There's Value in This High-Dividend ETF
Jun. 24, 2016 - Morningstar, Inc. -  This low-cost exchange-traded fund offers an attractive yield while diversifying risk.

Finding Your Sweet Spot Along the Dividend Spectrum
Jun. 22, 2016 - Morningstar, Inc. -  Dividend strategies can look and behave differently from one another depending on how they manage the trade-off between income and dividend growth.

Ready, Fire, Aim: The ETF Industry Blasts Its Spaghetti Cannon
Jun. 17, 2016 - Morningstar, Inc. -  Though there are now over 1,900 exchange-traded products to choose from, most of us could build a perfectly suitable, low-cost portfolio selecting a small handful of the 100 largest.

ESG + ETF = BFFs?
Jun. 15, 2016 - Morningstar, Inc. -  Investor demographics are slowly turning in favor of the pairing of impact-oriented strategies and the exchange-traded fund chassis, and investors' need for relevant analytics is growing as a result.

Older Doesn't Mean Better
Jun. 10, 2016 - Morningstar, Inc. -  There are broader, cheaper options than this 2000-era world-stock ETF.

What Is an Emerging Market?
Jun. 08, 2016 - Morningstar, Inc. -  MSCI will answer this question with its June 14 announcement regarding changes to its indexes.

A Dynamic Currency-Hedged Stock Strategy
Jun. 03, 2016 - Morningstar, Inc. -  This international-stock ETF places currency bets in an attempt to enhance performance.

Mind the Gap: Active Versus Passive Edition
Jun. 01, 2016 - Morningstar, Inc. -  The biggest costs investors tend to incur don’t show up on a fact sheet but are a product of their own bad behavior.

Defensive Exposure to Stocks Abroad
May. 27, 2016 - Morningstar, Inc. -  This low-volatility ETF should give international-stock investors a smoother ride and better downside protection.

Risks and Opportunities in Senior Loan ETFs
May. 25, 2016 - Morningstar, Inc. -  These investments offer attractive yields and can hold up well when interest rates rise, but they come with considerable credit and liquidity risk.

Can Anything Stop Vanguard?
May. 13, 2016 - Morningstar, Inc. -  Short of an unlikely breach of investor trust, Morningstar’s Ben Johnson thinks the fund giant will continue its momentum.

Keep Your Focus on Fees
May. 11, 2016 - Morningstar, Inc. -  Our semi-annual Active/Passive barometer shows that expenses are one of the only reliable predictors of success, writes Morningstar’s Ben Johnson.

Why Strategic Beta Makes Sense
May. 10, 2016 - Morningstar, Inc. -  This Time Is Different
Thanks for bearing with me this far.
As I have learned from bitter experience, the topic of strategic beta--or “smart beta,” as fund marketers would have it--is not exactly a crowd-pleaser. Today’s article would generate much more interest were the subject Vanguard, or 401(k) plans, or how to make one’s money last while in retirement. Compared with those evergreen themes, the latest investment innovation seems trivial.

A Defensive, Low-Cost Dividend Growth ETF
May. 06, 2016 - Morningstar, Inc. -  This dividend strategy has shone during market downturns by favoring companies with durable competitive advantages.

Defensive ETFs: Too Good to Be True?
May. 04, 2016 - Morningstar, Inc. -  Defensive strategies, like those followed by low-volatility ETFs, can produce better risk-adjusted returns while smoothing out the highs and lows of the market.

Timeless Investment Lessons From Warren Buffett's Business Partner, Charlie Munger
Apr. 29, 2016 - Morningstar, Inc. -  A look at the worldview and investment philosophy of one of the great investors of our time. Plus, four ETFs that we believe have many of the characteristics that Munger (and Buffett) look for.

A Distinctive Dividend-Growth ETF
Apr. 27, 2016 - Morningstar, Inc. -  This quality strategy looks beyond past dividend growth.

A Low-Volatility ETF for Emerging Markets
Apr. 22, 2016 - Morningstar, Inc. -  A more tempered ride, in both downturns and in upturns.

ETFs Get Even Cheaper
Apr. 20, 2016 - Morningstar, Inc. -  Average fees paid by ETF investors have fallen over the last decade as low-cost options gain popularity and large flows create economies of scale.

A Portfolio of High-Quality Dividend-Paying Stocks at a Rock-Bottom Price
Apr. 15, 2016 - Morningstar, Inc. -  Schwab U.S. Dividend Equity ETF is a solid core holding with an income orientation.

Currency Hedgers Behaving Badly
Apr. 13, 2016 - Morningstar, Inc. -  Some newly minted currency hedgers seem to lack the fortitude necessary to reap the long-term benefits of hedging currency risk.

Everything You Need to Know About Strategic-Beta ETFs
Apr. 08, 2016 - Morningstar, Inc. -  Much of what investors need to know about strategic-beta funds has already been learned from decades of examining active strategies and how investors vet them and put them to use.

Low-Cost Exposure to U.S. Healthcare Firms
Apr. 01, 2016 - Morningstar, Inc. -  Investors seeking high-quality North American healthcare companies can consider  Health Care Select Sector SPDR (XLV). Given the sector's lack of economic sensitivity, investors seeking a defensive tilt for a broad portfolio may view this exchange-traded fund as a suitable satellite holding. XLV's holdings comprise all of the S&P 500's healthcare exposure, so owning this ETF and  SPDR S&P 500 (SPY)means investors effectively are doubling up on healthcare. In March 2016, the healthcare sector represented about 14.1% of the S&P 500.

A Solid Choice for Broad Exposure to the U.S. Muni Market
Mar. 25, 2016 - Morningstar, Inc. -  This fund is the largest and most-liquid municipal-bond ETF.

A Distinct Approach to Investing in Dividend-Paying Mid-Caps
Mar. 18, 2016 - Morningstar, Inc. -  This ETF weights mid-caps by the dollar amount of dividends paid, instead of simply targeting the highest-yielding stocks.

Value Investors Are Vexed
Mar. 16, 2016 - Morningstar, Inc. -  Value's decade-long slump is testing contrarians' patience.

Durable and Defensive: A Look at Consumer Staples ETFs
Mar. 09, 2016 - Morningstar, Inc. -  If investors can get past valuations in the consumer staples sector, there are a raft of low-cost ETF options offering access to the space.

An Unconventional Play on Value
Mar. 04, 2016 - Morningstar, Inc. -  This fundamentally weighted ETF allows investors to profit from mean reversion in valuations.

iShares Gold Trust Suspends New Creations
Mar. 04, 2016 - Morningstar, Inc. -  A flood of safe-haven buyers causes a precarious situation in this gold exchange-traded product.

Under the Hood of 5 Multifactor Funds
Mar. 02, 2016 - Morningstar, Inc. -  All these funds attempt to reduce the risk of underperformance by diversifying across multiple 'factors,' but there are important differences among them.

Check This Out Before Jumping Aboard International Dividend ETFs
Feb. 26, 2016 - MLP HINDSight -  These 'driver-less' funds may be going places you might not want to be.

Exposure to the Hard-Hit Energy Sector, at a Low Cost
Feb. 19, 2016 - Morningstar, Inc. -  For investors bold enough to venture into the bruised U.S. energy sector, this ETF is one of the best bargains around.

Cheap Exposure to U.S. Consumer Discretionary Stocks
Feb. 12, 2016 - Morningstar, Inc. -  This exchange-traded fund is one of the best bargains in the consumer cyclical Morningstar Category.

The Cost Matters Hypothesis
Feb. 10, 2016 - Morningstar, Inc. -  While markets’ efficiency will be forever questioned, there is no question that the costs we incur in investing deduct directly from our returns--it’s simple subtraction

Cheap Exposure to Large-Value Stocks
Feb. 05, 2016 - Morningstar, Inc. -  This ETF is one of the best bargains in the U.S. large-value Morningstar Category.

What to Make of the Buyback Bonanza
Feb. 03, 2016 - Morningstar, Inc. -  Buybacks are in vogue, but many investors still prefer good old-fashioned dividends.

Reminder: Notes Are Not Funds
Jan. 27, 2016 - Morningstar, Inc. -  Recent events have served up a not-so-gentle reminder of the perils of investing in exchange-traded notes.

Own the Whole U.S. Stock Market on the Cheap
Jan. 22, 2016 - Morningstar, Inc. -  A lower fee and a new benchmark have upped this total stock market ETF's appeal.

The Whole Market for Free?
Jan. 20, 2016 - Morningstar, Inc. -  A race to lower expense ratios on broad-market ETFs, along with other factors, has pushed the estimated holding costs of many funds to nearly zero, writes Morningstar's Ben Johnson.

Feeling Gravity's Pull
Jan. 15, 2016 - Morningstar, Inc. -  Amid significant underperformance in 2015 and likely more interest-rate hikes, can risky mortgage REITs turn things around? Here's a look at the largest mortgage REIT exchange-traded fund.

Will Rising Rates Power Down Utilities Stocks?
Jan. 13, 2016 - Morningstar, Inc. -  U.S. utilities stocks underperformed the S&P 500 in 2015. In aggregate, this defensive, high-yielding sector slid about 4.9%, which was about 615 basis points worse than the performance of the broad benchmark. And while the bondlike utilities sector's underlying fundamentals generally remain strong, the sector's underperformance stems from the long-standing relationship between the price performance of utilities firms and interest rates. 

Defensive Exposure to Small-Cap Stocks
Jan. 11, 2016 - Morningstar, Inc. -  This ETF should give small-cap investors a smoother ride, though it has some distinct risks.

ETFs: Tax-Efficient, Not Tax-Exempt
Dec. 23, 2015 - Morningstar, Inc. -  Thanks mostly to their under­lying strategies and their unique structure, ETFs are relatively more tax-efficient, but they're not immune from taxation.

Currency-Hedged ETFs Can Serve as Core Holdings
Dec. 16, 2015 - Morningstar, Inc. -  Currency-hedged exchange-traded funds continue to enjoy strong inflows in 2015. Through the first 11 months of the year, a net $45 billion flowed into these products, accounting for a significant slice of the net $209 billion of flows into international-equity funds and ETFs.

A Targeted Way to Home in on Housing
Dec. 11, 2015 - Morningstar, Inc. -  This ETF holds mostly homebuilders but includes some housing-related subsectors as well.

Dividend Investing: Man vs. Machine
Dec. 09, 2015 - Morningstar, Inc. -  At our sixth annual Morningstar ETF Conference, I moderated a panel on dividend investing. We had a diverse group, featuring Fidelity’s Ramona Persaud (the active manager), WisdomTree’s Jeremy Schwartz (the indexer), and CLS Investments’ Scott Kubie (the ETF strategist).

A Low-Cost ETF Offering Exposure to U.S. Banks
Dec. 04, 2015 - Morningstar, Inc. -  Banks have outperformed broader stocks in 2015, as investors are bullish on higher interest rates and credit quality has stayed strong.

Which ETFs Are Making Capital Gains Distributions This Year?
Dec. 02, 2015 - Morningstar, Inc. -  For investors, one of the most appealing aspects of exchange-traded funds is their clear tax efficiency.

What's Behind Your Bond Fund's Returns?
Nov. 25, 2015 - Morningstar, Inc. -  Bond investors require compensation for bearing greater credit and interest-rate risk through higher expected returns, or yields. Fixed-income managers can--and often do--boost returns by taking more credit or interest-rate risk than their benchmarks, but that does not necessarily require skill. 

Only the Highest Quality Junk (Bonds)
Nov. 20, 2015 - Morningstar, Inc. -  Unlike traditional bond indexes, which typically give higher weightings to issuers with the greatest amount of debt,  PowerShares Fundamental High Yield Corporate Bond Index's (PHB) index-weights its holdings according to fundamental measures of issuers' size, including sales, cash flow, dividends, and the book value of their assets.

A Guide to Selecting Strategic-Beta ETPs
Nov. 11, 2015 - Morningstar, Inc. -  A brief guide outlining how we set out to separate the wheat from the chaff in this field.

A Great Complement to an S&P 500 Fund
Nov. 06, 2015 - Morningstar, Inc. -  Vanguard Extended Market can be used to round out a large-cap portfolio, but mind its quirks.

How Well Have Large-Blend Funds Performed? It Depends.
Nov. 04, 2015 - Morningstar, Inc. -  How well have large-blend mutual funds performed during the past 10 years? That question is not as easy to answer as it might seem. At face value, the average trailing 10-year return for all mutual funds currently in the large-blend Morningstar Category was 5.97% at the end of September 2015. Not too shabby--considering the tremendous volatility the markets have experienced during the past decade. This number is displayed as the category average return in the Performance tab for individual funds on Morningstar.com.

New ETFs Look for Quality in Japan
Oct. 30, 2015 - Morningstar, Inc. -  These ETFs screen for companies with higher returns on equity and independent directors.

Frontier Markets Haven't Been Immune
Oct. 28, 2015 - Morningstar, Inc. -  The risks of frontier markets become more visible in a persistent slow global growth environment.

A Low-Cost, High-Yielding Equity Sector ETF
Oct. 23, 2015 - Morningstar, Inc. -  In a low-rate environment, this large, liquid ETF, which holds the biggest U.S. utilities firms, could offer some appeal.

Are MLPs Going Down the Tubes?
Oct. 21, 2015 - MLP HINDSight -  A look at the largest ETPs available for investors in this battered corner of the market.

The Sector-Neutral Value ETF
Oct. 16, 2015 - Morningstar, Inc. -  This is a compelling large-value offering, but there are some drawbacks to its sector-neutral approach.

A Closer Look at the New John Hancock ETFs
Oct. 14, 2015 - Morningstar, Inc. -  These funds effectively mimic Dimensional’s distinctive investment approach in an index format.

A Rough Year for Natural Gas Attracts the Bottom-Pickers
Oct. 09, 2015 - Morningstar, Inc. -  It may be tempting to try to catch a rebound, but know what you're getting into first.

Rethinking Commodities
Oct. 07, 2015 - Morningstar, Inc. -  The biggest return-driver for commodity futures is market structure, not fundamentals or spot prices.

What You Need to Know About 'Strategic Beta'
Sep. 30, 2015 - Morningstar, Inc. -  As these sometimes complex new funds continue to grow, investors need to be selective, writes Morningstar’s Ben Johnson.

Currency-Hedged ETFs Still Popular
Sep. 25, 2015 - Morningstar, Inc. -  Generally speaking, most international-equity funds do not hedge their foreign-currency exposure. During the last few years, major foreign currencies such as the yen and euro have been falling against the U.S. dollar, and this has negatively impacted the performance of funds that invest abroad. 

China Opens 'A' Door for Foreign Investors
Sep. 23, 2015 - Morningstar, Inc. -  Index funds are likely to add China A-Shares in the coming years.

A Deep-Value ETF for Income Seekers
Sep. 18, 2015 - Morningstar, Inc. -  This exchange-traded fund could serve as a supporting player to boost dividend yields.

Funds That Channel Ben Graham
Sep. 16, 2015 - Morningstar, Inc. -  Popular dividend-oriented ETFs that tilt toward yield or dividend growth have their roots in the teachings of Ben Graham.

A Cheap Way to Bulk Up on Consumer Exposure
Sep. 11, 2015 - Morningstar, Inc. -  This low-cost ETF offers a basket of consumer-discretionary firms whose success hinges on consumer sentiment.

Just a Bump in the Road for the Global Infrastructure Sector?
Sep. 09, 2015 - Morningstar, Inc. -  This ETF has been battered by the decline in energy prices and weakness in emerging markets.

Diversified Exposure to Quality Stocks
Sep. 04, 2015 - Morningstar, Inc. -  This ETF offers a low-cost way to invest in profitable companies with durable competitive advantages.

Corporate Credit Spreads on the Rise
Aug. 28, 2015 - Morningstar, Inc. -  In light of the increased compensation being offered by the asset class, we spotlight a corporate-bond ETF with limited interest-rate risk.

Be Cautious With Commodity Exchange-Traded Products
Aug. 26, 2015 - Morningstar, Inc. -  Academic research suggests that commodities can play a role in a balanced asset allocation. A track record of providing uncorrelated returns has won the commodities Morningstar Category a place in many portfolios as an attractive diversifier in a mix of stocks, bonds, and cash.

The Cheapest Fund for All-Cap, Developed-, and Emerging-Markets Exposure
Aug. 14, 2015 - Morningstar, Inc. -  Vanguard made a bold move in June when it announced that it will be adding onshore-listed China A-shares to the  Vanguard FTSE Emerging Markets ETF (VWO) portfolio later this year. However, this emerging-markets fund will be the only one of Vanguard’s international-equity funds to make this addition (although Vanguard may decide to add China A-shares to other funds at a later date).

Flows Into Foreign Equity Funds Remain Strong
Aug. 12, 2015 - Morningstar, Inc. -  Investor rebalancing is a contributor.

When Only the Biggest Stocks Will Do
Aug. 07, 2015 - Morningstar, Inc. -  Mega-cap stocks may be slow-growing, but their low volatility has appeal.

What's Behind Your Fund Returns?
Aug. 05, 2015 - Morningstar, Inc. -  Beta may be boring, but it provides the majority of funds' returns.

An Exchange-Traded Note for Low-Cost Exposure to MLPs
Jul. 29, 2015 - Morningstar, Inc. -  MLPs have fallen out of favor this year amid lower commodity prices, currency concerns, and interest-rate fears. This ETN offers broad exposure to the asset class.

Sizing Up a Distinctive Approach to Tilting Toward Smaller-Cap Stocks
Jul. 24, 2015 - Morningstar, Inc. -  This exchange-traded fund tilts toward smaller and more-defensive names in the large-cap universe.

What Upcoming Index Changes Mean for Two Factor ETFs
Jul. 22, 2015 - Morningstar, Inc. -  BlackRock is switching benchmarks for two of its factor ETFs, but this change may help one ETF more than the other.

Agricultural Commodities in the Spotlight
Jul. 15, 2015 - Morningstar, Inc. -  Globally, calorie consumption is growing and could spur demand as well as a need for greater agricultural productivity.

There's More to ETF Liquidity Than Meets the Eye
Jul. 15, 2015 - Morningstar, Inc. -  Exchange-traded funds' unique structure provides two sources of liquidity.

Should I Take the Plunge into Currency-Hedged ETFs?
Jul. 14, 2015 - Morningstar, Inc. -  Trying to time your portfolio’s currency exposure could cost you money.

Dramatic Moves in Chinese Equities Having Minimal Impact on the Average Investor
Jul. 10, 2015 - Morningstar, Inc. -  China typically accounts for about a 1% allocation in a 60/40 stock/bond portfolio.

One of the Most Useful ETF Data Points You May Never Have Heard Of
Jul. 08, 2015 - Morningstar, Inc. -  Morningstar's fair value metric is a useful touch point for ETF investors doing their homework on equity valuations.

Valuations Across the Sectors of the S&P 500
Jul. 01, 2015 - Morningstar, Inc. -  It can be helpful to evaluate both fundamental and relative equity valuations, with a few caveats.

A Low-Cost, Core Equity Portfolio From iShares
Jun. 26, 2015 - Morningstar, Inc. -  IShares Core S&P Total US Stock Market (ITOT) provides convenient and low-cost exposure to U.S. stocks and can serve as a core equity holding. The S&P 1500 Index that this fund tracks does not include as many small- or micro-cap stocks as other U.S. broad or total stocks market indexes from Russell or CRSP. 

A Look at Merger-Arbitrage ETPs
Jun. 17, 2015 - Morningstar, Inc. -  Fueled by continued deal activity, merger-arbitrage ETPs offer an alternative for investors seeking a cash substitute.

Global Diversification With a Smoother Ride
Jun. 12, 2015 - Morningstar, Inc. -  Although this low-volatility global equity ETF holds U.S. stocks, it has offered more diversification from the S&P 500 than the average world-stock fund.

Adding China A-Shares to the Index: What It Means for Fundholders
Jun. 10, 2015 - Morningstar, Inc. -  Vanguard Emerging Markets is adding China A-shares, and MSCI says it soon will, too.

A Unique Way to Invest in Emerging-Markets Sovereign Bonds
Jun. 05, 2015 - Morningstar, Inc. -  This fixed-income ETF screens for the most-undervalued emerging-markets sovereign bonds and weights each country equally.

Discipline at the Core
Jun. 03, 2015 - Morningstar, Inc. -  Investing has always been part art and part science, but leaning more heavily on a scientific approach may help improve consistency. Through fundamental research, a manager may decide to purchase stocks with varying degrees of value, momentum, and market exposure--the elements that appear to drive stock returns. But without directly targeting these dimensions of return, a portfolio's risk and expected return relative to the market can change over time.

A Tactical Tool For Dialing Down Fixed-Income Risk
May. 29, 2015 - Morningstar, Inc. -  This ETF is light on interest-rate risk and light on credit risk.

Trouble With the (Yield) Curve
May. 27, 2015 - Morningstar, Inc. -  Because interest rates do not always move in tandem, investors need to pay close attention to the yield curve and spreads to gauge risk.

Scouring S&P 500 Sectors For Bargains
May. 22, 2015 - Morningstar, Inc. -  The energy sector looks to be the last pocket of value in a fairly priced market.

An ETF for Low-Cost Exposure to Large-Cap Financials
May. 01, 2015 - Morningstar, Inc. -  With an interest-rate hike at the forefront, here's a closer look at an inexpensive financial-services exchange-traded fund.

8 Popular ETPs That Have Launched in Recent Months
Apr. 29, 2015 - Morningstar, Inc. -  A look at new exchange-traded products--most of which are narrowly constructed--that have attracted the most assets in the past six months.

Cheap Access to the Investment-Grade Bond Market
Apr. 24, 2015 - Morningstar, Inc. -  This fund's high-quality tilt can help diversify and protect an investor's portfolio.

Setting Expectations for Stock Returns
Apr. 17, 2015 - Morningstar, Inc. -  The past may not be a good guide for the future, but a forward-looking framework can help investors set realistic return expectations.

Cheap Exposure to Small-Value Stocks
Apr. 15, 2015 - Morningstar, Inc. -  This may not be the deepest small-value fund available, but its low expense ratio makes it one of the best bargains in the category.

Avoid a Potential Minefield in the Oil Patch
Apr. 10, 2015 - Morningstar, Inc. -  This ETF offers a cheap and broadly diversified way to invest in the volatile energy sector.

Should You Invest in a Currency-Hedged International-Equity ETF?
Apr. 08, 2015 - Morningstar, Inc. -  Currency-hedged ETFs have recently delivered category-topping performance, but moving in and out of these products may not be a sustainable strategy for long-term investors.

A Closer Look at One of Our Favorite Dividend ETFs
Apr. 03, 2015 - Morningstar, Inc. -  Schwab U.S. Dividend Equity ETF offers a high-quality portfolio at a very low price.

India Continues to Be a Bright Spot Among Emerging-Markets Countries
Mar. 25, 2015 - Morningstar, Inc. -  As most equity markets around the world remain sluggish, India-focused funds continue to perform in 2015, up an average of 6% year to date, and that's on the heels of an average 40% return in 2014. 

Small-Cap Indexing: Popularity Can Be a Pain
Mar. 20, 2015 - Morningstar, Inc. -  The Russell 2000 Index is the most popular benchmark for active small-cap managers to measure themselves against. But here is an industry secret: Active managers pick that index because it is easy to beat. If you're going with a passive strategy, you don't have to limit yourself to that index. 

Play Defense With This ETF
Mar. 13, 2015 - Morningstar, Inc. -  A low-cost way to access 39 consumer defensive firms found in the S&P 500.

Health-Care Funds: Hale and Hearty
Mar. 11, 2015 - Morningstar, Inc. -  Health-care stocks' performance has amazed. Here's an outlook for the sector, along with some active and passive options for investors.

Will a New Type of Fund Give Active Managers a Fighting Chance?
Mar. 06, 2015 - Morningstar, Inc. -  During the past 15 years, actively managed U.S. equity funds have suffered cumulative net redemptions of $367.8 billion, while passive domestic and international-stock funds have attracted a combined $1.89 trillion. Might the former group of funds be able to learn something from the latter?

Cheap Exposure to the Universal Bond Index
Mar. 06, 2015 - Morningstar, Inc. -  With yields at all-time lows, many income-seeking investors have been chasing yield, investing in everything from high-yield corporate bonds to high-quality dividend-paying stocks. However, chasing yield can often lead to increased volatility, increased probability of permanent capital loss, and returns that are more correlated to stocks. Said another way, when chasing yield, fixed-income investors often face disappointing and costly consequences.

Cost-Efficient Exposure to Momentum
Feb. 27, 2015 - Morningstar, Inc. -  In many cases, extrapolating past performance into the future is a bad idea. In fact, securities that have outperformed for several years tend to become more expensive and priced to offer lower returns going forward. But in the short run, recent performance trends tend to persist. Winners over the past six to 12 months tend to continue to outperform for the next several months, while those that have underperformed often continue to lag. This phenomenon is known as momentum. It has been observed in nearly every market studied and across different asset classes over long periods. Investors can get efficient exposure to stocks with positive momentum through  iShares MSCI USA Momentum Factor (MTUM) for a low 0.15% expense ratio. 

The Russell 2000 Index's Achilles' Heel
Feb. 25, 2015 - Morningstar, Inc. -  While low expense ratios make index funds appealing, indexes can incur meaningful transaction costs that are often overlooked. Changes in an index's constituents force the funds that track it to buy and sell the affected securities around the same time. These concentrated trades can move prices away from the index fund managers, creating a drag on their performance. Such market-impact costs tend to be larger among smaller-cap stocks. Here, differences in portfolio construction and the popularity of the index in question can have a noticeable impact on performance. Market-impact costs have especially plagued the Russell 2000 Index and will likely continue to put it at a disadvantage to its peers. 

Betting on Oil
Feb. 18, 2015 - Morningstar, Inc. -  The collapse in oil prices in the back half of 2014 has prompted some bargain-hunters to take their chances bottom-fishing the volatile commodity. In just the past four months, exchange-traded products offering exposure to energy markets via futures contracts have attracted about $3.5 billion in asset flows. That figure represents a remarkable 80% of the $4.3 billion in total assets invested in the category as of the end of January.

Gold Slides as the Greenback Climbs
Feb. 13, 2015 - Morningstar, Inc. -  Earlier this week, I wrote about the mechanics and merits of hedging the foreign-currency exposure in an international-equity portfolio, a feat made increasingly straightforward in the wake of the recent proliferation of currency-hedged exchange-traded funds. These funds might take the sting out of a sliding yen or stumbling euro, which have been losing ground to the U.S. dollar of late. As the dollar has risen, one of the world's oldest currencies has also been suffering. The price of gold has slipped some 3% over the past year, while the ICE U.S. Dollar Spot Index has risen by more than 17%. (See chart below.)

A More Tempered Global Equity Fund
Feb. 06, 2015 - Morningstar, Inc. -  Low-volatility strategies, such as the iShares minimum volatility family of exchange-traded funds, can be attractive options for long-term investors. This is because these ETFs' underlying MSCI indexes generally exhibit less-dramatic declines in bear markets. Over the long term, these muted drawdowns explain much of the strategy’s outperformance versus its cap-weighted benchmark. 

Sell Underperforming Funds With Large Personal Unrealized Capital Gains?
Feb. 04, 2015 - Morningstar, Inc. -  The Scenario
Over the past two years, U.S. equities have delivered very strong returns. The one downside is that in both years, you received large capital gains distributions from your U.S. equity fund investment. If you had no personal loss carryforwards, you had to cut a check to Uncle Sam when you filed your 2013 tax returns and will have to do so again for your 2014 taxes. Another significant concern is that this fund has been underperforming a comparable index fund over the past three and five years, annualized. However, you have held this fund in a taxable account for a long time, and your cost basis is significantly lower than the current net asset value. In other words, selling this fund to move into an index fund or exchange-traded fund will result in a large capital gains tax liability.

The 6 Best Passive Large-Cap ETFs
Jan. 30, 2015 - Morningstar, Inc. -  Passive large-cap funds won the performance battle in 2014.

For Passive Funds, a Stronger Link Between Fees and Performance
Jan. 28, 2015 - Morningstar, Inc. -  When it comes to fund performance, you don't always get what you pay for.

A Low-Tech Index Offering Exposure to the High-Tech Sector
Jan. 23, 2015 - Morningstar, Inc. -  The case for the tech-heavy, large and liquid PowerShares QQQ ETF remains a strong one.

Is Retail in Retreat?
Jan. 21, 2015 - Morningstar, Inc. -  As retailers have fallen under pressure to start the year, we look at retail ETFs for investors who see a buying opportunity.

How Do Fidelity's New Bond Exchange-Traded Funds Stack Up?
Jan. 20, 2015 - Morningstar, Inc. -  Fidelity follows PIMCO's footsteps in launching actively managed bond ETFs.

Preserve Purchasing Power With This ETF
Jan. 16, 2015 - Morningstar, Inc. -  This fund provides low-cost exposure to Treasury Inflation-Protected Securities, which can protect investors from long-term unexpected inflation.

Watch Your Step When Using Bond Ladder ETFs
Jan. 14, 2015 - Morningstar, Inc. -  Bond ladder ETFs can reduce cost and risk and can increase liquidity. However, investors should be aware of some potential drawbacks.

ETF Flows Set a Fresh Record in 2014
Jan. 09, 2015 - Morningstar, Inc. -  The $241 billion of inflows into U.S. exchange-traded funds in 2014 were the strongest ever and topped the $190 billion inflow in 2012. Strong flows and market appreciation helped push assets to $2 trillion, and that milestone comes just four years after hitting $1 trillion.

The Benefits and Costs of Socially Responsible Investing
Jan. 07, 2015 - Morningstar, Inc. -  Corporate social responsibility can make good business sense, but the investment options can be a little pricey.

Under the Hood of SPDR Barclays High Yield Bond ETF
Dec. 26, 2014 - Morningstar, Inc. -  It offers an attractive yield but is heavily concentrated in the industrials sector.

The Best U.S. Equity Factor ETFs
Dec. 24, 2014 - Morningstar, Inc. -  The exchange-traded fund universe is as vast and absurd as a Las Vegas buffet. Here's how to pick the best factor funds.

A Popular Emerging-Markets Consumer ETF Rocked by Currency Volatility
Dec. 19, 2014 - Morningstar, Inc. -  Large exposures in South Africa, Brazil, and Chile have weighed on the performance of this fund.

Frontier Markets Begin to Emerge
Dec. 17, 2014 - Morningstar, Inc. -  But for investors, frontier-markets funds have short track records and carry unique risks.

Efficient Exposure to Mid-Cap Stocks
Dec. 12, 2014 - Morningstar, Inc. -  While this isn’t the only ETF that tracks the S&P MidCap 400 Index, a structural advantage gives this fund an edge.

ETFs Are Not Always Cheaper
Dec. 10, 2014 - Morningstar, Inc. -  On an asset-weighted basis, institutional mutual fund share classes are lower than ETFs' in all but one Morningstar Category.

A Broad, Low-Cost REIT ETF for a Low-Rate Environment
Dec. 05, 2014 - Morningstar, Inc. -  Throughout 2014, interest rates have defied many expectations to the contrary by declining. That's been good news for the United States REIT space, which has performed well this year.

What Kinds of ETFs Are Making Capital Gains Distributions This Year?
Dec. 03, 2014 - Morningstar, Inc. -  A look at the exchange-traded funds and providers that have announced projected capital gains distributions thus far.

A Deep-Value Quantitative Hedge Fund Strategy
Nov. 21, 2014 - Morningstar, Inc. -  ValueShares US Quantitative Value (QVAL) has an unusual history. Its creator, Drexel University finance professor Wesley Gray, began his career as a money manager while studying for his Ph.D. at the University of Chicago under Eugene Fama. Friends and family gave Gray around $3 million to run in a systematic value strategy.

Still Excellent Without Bill Gross
Nov. 14, 2014 - Morningstar, Inc. -  An analysis of PIMCO Total Return ETF.

A Dynamic Approach to Value Investing Abroad
Nov. 07, 2014 - Morningstar, Inc. -  This fundamentally weighted exchange-traded fund offers a good way to overweight value stocks in foreign developed markets.

Diversification Benefits of REITs
Nov. 05, 2014 - Morningstar, Inc. -  REITs look richly valued right now, but they have potential as a long-term diversifier and source of income.

Emerging-Markets Bonds in a Rising U.S. Dollar Environment
Oct. 31, 2014 - Morningstar, Inc. -  The U.S. dollar has been rising and likely will remain strong in the medium term, thanks to a relatively healthier U.S. economy and the expectation that the U.S. will normalize its monetary policy before the eurozone and Japan. In a strong U.S. dollar environment, investors considering emerging-markets bonds to diversify their portfolios may want to focus on funds that invest in U.S. dollar-denominated sovereign debt, such as  iShares J.P. Morgan USD Emerging Markets Bond (EMB) or  PowerShares Emerging Markets Sovereign Debt ETF (PCY), both of which are currently yielding above 4%.

Where Are the Opportunities in Emerging Markets Today?
Oct. 29, 2014 - Morningstar, Inc. -  It is difficult to find attractively valued assets today. Interest rates in the developed world remain near record lows, and investors continue to pour into riskier assets, driving up valuations. U.S. stocks have enjoyed a five-year rally, with the S&P 500 currently trading at a trailing 12-month price/earnings multiple of 18 times, above their historical average of 15 times. Certain pockets of the emerging markets are also trading at lofty valuations, thanks to new market-friendly reforms (Mexico) or a relatively strong near-term growth outlook (the Philippines).

Finding the Best Fund for a Passive Allocation to U.S. Equities
Oct. 24, 2014 - Morningstar, Inc. -  How many funds is enough?  Vanguard Target Retirement 2055 (VFFVX) is a fund of funds that consists of just four funds: one for U.S stocks, U.S. bonds, international stocks, and international bonds. In contrast,  MassMutual RetireSMART 2055 (MMWAX) has 35 funds, of which 17 are focused on U.S. stocks. There is a separate fund for small-cap exposure, small-cap value, and small-cap growth. Which approach is better--a single fund to cover an entire asset class or separate funds that carve up and target specific segments of an asset class? A truly passive approach would seem to favor the former.

A Value Strategy That Doubles Down When Stocks Get Cheaper
Oct. 22, 2014 - Morningstar, Inc. -  Value investors get compensated for taking contrarian bets, particularly when it is agonizing to do so. Sam Zell, known as "the grave dancer" for his penchant for buying companies as they emerged from bankruptcy, sold his Equity Office Properties Trust near the peak of the real estate market in 2007. In the depths of the financial crisis, Warren Buffett took a large stake in Goldman Sachs, which was desperate for capital at the time.

Opportunity in the World’s Roads, Railways, and Water Systems
Oct. 17, 2014 - Morningstar, Inc. -  Thus far this year, earnings releases and economic reports have shown a mixed bag for some global infrastructure firms, with both positive and not-so-positive news. Traffic volumes on toll-road operators in Europe have unexpectedly rebounded nicely, while Chinese toll-road operators have struggled amid government regulation and general complaints from citizens about excessive tolls.

The Most Popular ETF Debuts of 2014
Oct. 15, 2014 - Morningstar, Inc. -  Despite recent global unrest and questions about global growth, United States equity markets remain near record highs, and the U.S. economy continues to strengthen, with still-declining unemployment, solid growth, and modest inflation.

Much-ballyhooed predictions of higher interest rates haven't yet come to pass, and with U.S. equity market valuations at such elevated levels, investors with extra cash to put to work may be asking themselves where to find compelling investment opportunities.

A Unique Way to Invest in the Eurozone
Oct. 10, 2014 - Morningstar, Inc. -  Despite the risks they face, eurozone stocks may offer good diversification benefits to U.S. investors. However, currency risk is a very real threat. Low to negative interest rates across the eurozone, coupled with lackluster growth, could cause the euro to weaken relative to the U.S. dollar. WisdomTree Europe Hedged Equity ETF (HEDJ) offers investors a way to gain exposure to European stocks, while hedging this currency risk.

Fidelity Launches 3 Actively Managed Bond ETFs
Oct. 09, 2014 - Morningstar, Inc. -  Today, Fidelity debuted its first actively managed exchange-traded funds: a trio of bond ETFs whose strategies mirror those of three of Fidelity's actively managed mutual funds.

Fidelity first filed paperwork with the SEC seeking permission to create actively managed ETFs in December 2012. Fidelity has been in the passively managed ETF space since 2003 with its Fidelity Nasdaq Composite Index Tracking Stock (ONEQ), although it wasn't until October 2013 that the firm rolled out a broad suite of passively managed U.S. equity sector ETFs.


Trouble With the (Yield) Curve
Oct. 08, 2014 - Morningstar, Inc. -  For more than a year, the term "interest rate" has struck fear among bond investors. These fears intensified recently after Federal Reserve comments sparked speculation that the Fed will begin to increase the federal-funds rate early next year. After all, as interest rates rise, most bond prices decline.

Strong Material for a Volatile Sector
Oct. 03, 2014 - Morningstar, Inc. -  The materials sector represents a very thin sliver of the U.S. stock market--just over 3% of the S&P 500. In contrast, this sector soaks up a meatier 9% of the FTSE All World ex-US Index. That’s partially because many of the leaders in the metals and mining industry are based outside the United States. Investors looking for greater exposure to this sector without delving into foreign stocks might consider  Vanguard Materials ETF (VAW). But this is appropriate only for investors with a high risk-tolerance.

Performance Evaluation Tool Kit
Oct. 01, 2014 - Morningstar, Inc. -  Most investors pay lip service to the idea that past performance is not indicative of future results. But it's tempting to use past performance to gauge manager skill and form expectations for the future. Unfortunately, raw performance doesn't say much about skill. An unskilled manager can outperform if he is lucky (or vice versa) or takes more risk to boost returns, which may not continue to pay off in the future. While raw performance does not tell the whole story, it is possible to uncover useful information from past performance with the appropriate tools.

A Tale of Two Dividend Growth Funds
Sep. 26, 2014 - Morningstar, Inc. -  Expense ratios are one of the best predictors of relative fund performance. This lends support to low-cost index investing. But sometimes it can be beneficial to pay a little more for active management.  Vanguard Dividend Appreciation ETF (VIG) and  Vanguard Dividend Growth (VDIGX) offer an excellent case in point. Both funds target stocks with strong records of dividend growth, but where the exchange-traded fund tracks an index, Vanguard Dividend Growth applies active management to achieve the same goal. Yet despite its higher expense ratio, Vanguard Dividend Growth has outpaced its ETF counterpart by 1.3% annualized since April 2006, when Vanguard launched the ETF (and its associated mutual fund share classes).

What You Need to Know About 'Strategic Beta'
Sep. 18, 2014 - Morningstar, Inc. -  "Smart beta," "alternative beta," "enhanced indexes," "quantamental indexes"--at this point, the list of monikers describing the fast-growing middle of the active-to-passive spectrum extends long enough to put it just a few syllables shy of making a lunar landing. It's an arena that has further blurred the lines between active and passive management (see Exhibit 1), and one which is at the leading edge of the most recent wave of product proliferation within the global exchange-traded products landscape.

An Aggressive Quality and Value Dividend Fund
Sep. 17, 2014 - Morningstar, Inc. -  It’s been a little over three years since  iShares Core High Dividend (HDV) launched. Now that iShares has slashed its fee to 0.12% from a rich 0.40%, this fund is worth another look. As a rough rule, I don’t like to buy U.S. stock exchange-traded funds with expense ratios higher than 0.25%. Thanks to bone-crunching competition among the titans of the ETF industry, there are plenty of good products that charge less than that.

South Korean Government Moves to Boost Economy--and Stock Market
Sep. 12, 2014 - Morningstar, Inc. -  The South Korean stock market has been a relative underperformer this year, partly because of weak economic growth and sluggish domestic spending. To address these issues, finance minister Choi Kyung-hwan earlier this summer announced a USD 40 billion stimulus package, and in August, the Bank of Korea cut the country's key interest rate for the first time in 15 months. Of greater interest to investors is a proposal that would push corporate South Korea to boost dividends.

What Is Your Emerging-Markets Allocation?
Sep. 11, 2014 - Morningstar, Inc. -  Investors' average 3% to 4% allocation is low given the rising importance of emerging markets.

A Dividend-Themed Strategic-Beta ETF From WisdomTree
Sep. 05, 2014 - Morningstar, Inc. -  WisdomTree LargeCap Dividend ETF (DLN) provides a handy alternative U.S. equity core holding for investors who want a value tilt and extra income. This fund targets high-dividend-paying companies and forgoes the standard market-capitalization weighting scheme traditional market indexes, such as the S&P 500, use. Instead, WisdomTree has an annual rebalancing in December when it assesses how much each company plans to pay in dividends over the next year and then weights each company's common stock by its percentage of the total planned dividend payout of all companies in the portfolio.

Strategic-Beta ETFs Seeing Stars
Sep. 03, 2014 - Morningstar, Inc. -  We are all familiar with the saying that past performance is no guarantee of future results. But that doesn't stop investors from picking funds this way. Before fund data became widely available and in order to facilitate meaningful comparisons, Morningstar developed a performance measure called the Morningstar Rating for funds. Unfortunately, some investors heavily rely on it when picking new funds, and investment flows consistently accrue to 4- and 5-star funds.

Where Are the Opportunities in U.S. Health Care?
Aug. 27, 2014 - Morningstar, Inc. -  As the sector has continued to best the broader market, a look both at the dynamics that would drive further outperformance by the sector and at funds that investors can use to tap those themes.

Low-Cost Exposure to Taxable Municipal Bonds
Aug. 27, 2014 - Morningstar, Inc. -  The recent credit troubles in Detroit and Puerto Rico should not scare investors away from the municipal bond market. Many of these securities offer similar--or better--yields than corporate bonds, with comparable credit risk. However, they do tend to carry greater interest-rate risk.  PowerShares Build America Bond ETF (BAB) may be an ideal offering for investors who can accept this risk.

Is the Aggregate Index Too Heavy in Treasuries?
Aug. 20, 2014 - Morningstar, Inc. -  In many markets, index investing is appealing because it takes a free ride on the collective efforts of active investors, offering comparable exposure at a fraction of the cost. As long as the index is representative of what active managers in the fund world are doing, it's a good bet that a low-cost index fund will beat the average manager in the category.

An Unconventional Risk-Management Tool
Aug. 20, 2014 - Morningstar, Inc. -  Fear and greed make most investors awful market-timers. It's easy to get excited about an investment after a period of good performance when valuations become stretched, only to turn around and dump it after the pain of a market downturn becomes too much to bear. This behavior is not entirely irrational. Large drawdowns at inopportune times can create a serious threat to investors' goals. 

How to Be Smarter About Risk Management
Aug. 14, 2014 - Morningstar, Inc. -  In isolation, risk is neither good nor bad. Finance 101 teaches that the market must offer higher expected returns as an asset's probability of declining in value or the potential magnitude of losses increases. Otherwise, given the choice between two investments, no one would hold the riskier one. Investors tend to compete away high-return, low-risk opportunities, so that risk is usually the primary source of investment returns. This is why risky asset classes, such as stocks, have historically offered higher returns than Treasuries over the long run.

A Dividend-Paying ETF in a Consolidating Industry
Aug. 08, 2014 - Morningstar, Inc. -  Morningstar's Take
The United States telecommunications industry is in flux, from the top down. For quite some time, AT&T (T) and Verizon (VZ) had consolidated much of the telecom space, to the point that the sector more or less consisted of those two heavyweights, and then everyone else. Recently, however, a new round of consolidation has been taking place, driven by a desire for greater economies of scale, more telecom spectrum, and a bulwark against cable operators' incursions onto what historically has been telecom firms' turf. Deals in the past 24 months have included T-Mobile (TMUS) buying MetroPCS, AT&T acquiring Leap Wireless, Sprint (S) bringing Clearwire under direct control, and Verizon buying Vodafone's (VOD) 45% stake in Verizon Wireless.

Capital Group Bets on a Different Kind of Tech
Aug. 07, 2014 - Morningstar, Inc. -  Capital Research and Management Company, the firm behind the storied American Funds franchise, has been on the ropes for years. The firm's cold streak began in 2008, and in the intervening six-plus years, the company has seen approximately one quarter of one trillion dollars of investors' money leave its lineup. That said, even after accounting for these outflows, American Funds remains the third-largest fund family in the U.S.

Diversification for the Sake of Diversification
Aug. 01, 2014 - Morningstar, Inc. -  I don’t know why Vanguard bothered to launch  Vanguard Total International Bond ETF (BNDX), a currency-hedged developed-markets bond fund. When you hedge foreign sovereign bonds, you end up with something that looks a lot like U.S. Treasuries. Vanguard points to some modest historical diversification benefits, but this backward-looking analysis fails to consider how present valuations and economic conditions affect prospective returns and correlations. 

Robo-Buffett Funds on the Cheap
Jul. 30, 2014 - Morningstar, Inc. -  In early June, State Street launched a series of foreign-equity SPDR exchange-traded funds tracking MSCI's Quality Mix, or QM, indexes. The funds charge 0.30%, making them the cheapest or near cheapest options in their respective categories.

China Opens Its Onshore Equity Markets to Foreigners
Jul. 25, 2014 - Morningstar, Inc. -  Morningstar Take
Five exchange-traded funds that provide direct access to China's onshore equity market (China A-shares) have launched over the past year. These launches are notable in that they provide access to an asset class that in the past had been inaccessible to foreign investors. While there is a degree of novelty to these products, China A-shares are an extremely niche asset class and more suitable for those who are very familiar with risks and opportunities of investing in the emerging markets, and especially in China. 

Hidden Risks in Emerging-Markets Debt?
Jul. 23, 2014 - Morningstar, Inc. -  Emerging-markets bonds, along with other higher-yielding fixed-income assets such as junk bonds and bank loans, have seen a surge in flows in recent years. Investor interest has been driven in large part by persistently low yields across the developed world. Growing demand for emerging-markets bonds also reflects a confluence of other fundamental factors. 

Strategic Beta: Taking the Alpha Out of AlphaDEX
Jul. 18, 2014 - Morningstar, Inc. -  Perhaps the biggest surprise in fund flows for exchange-traded products during the past year is the strength of First Trust. The firm has catapulted itself from the 11th largest provider of exchange-traded products to the sixth largest in just one year. Much of the strong flows are accumulating to funds that have been around for years. What has changed is the increasing acceptance of strategic beta. While they may track an index, strategic beta funds are active, so it is no surprise that investors might take a wait-and-see approach before investing, particularly when the methodology appears to be complex and untested. However, of the 23 First Trust AlphaDEX market-cap and sector funds (excluding the international AlphaDEX funds), the average Morningstar Rating is 4 stars, which is truly impressive. Unlike some single factor funds, the methodology behind AlphaDEX is fairly opaque, but their performance warrants a deep dive. 

A Closer Look at the Total Cost of ETP Ownership: Bid-Ask Spreads
Jul. 16, 2014 - Morningstar, Inc. -  Finding the lowest-cost exchange-traded product, or ETP, entails more than simply seeking out the one with the lowest expense ratio. The expense ratio is just one component of the total cost of ownership, which can be broken down into trading costs and holding costs. Investors have some degree of control over trading costs, which are made up of things such as the brokerage commission, the bid-ask spread, and the price impact resulting from large trades. On the other hand, the ETP's sponsor and the portfolio manager are largely responsible for the holding costs. 

Tread Cautiously in the Overvalued Utilities Sector
Jul. 11, 2014 - Morningstar, Inc. -  Utilities companies have made up significant ground this year after trailing the broader U.S. equity market by a wide margin in 2013. A broad utilities-oriented exchange-traded fund,  Vanguard Utilities ETF (VPU), has returned 14.5% year to date, versus the S&P 500 Index's 7.7% return during the same interval.

A Rough Road for Financial-Services ETFs
Jul. 09, 2014 - Morningstar, Inc. -  In the first half of 2014, the market performance of the U.S. financial-services sector trailed the broader U.S. equity market by several hundred basis points.

Thus far this year, there have been some small bumps in the road for a sector that has enjoyed a robust comeback during the past five years, but where volatility remains meaningfully high and uncertainty even higher. While no one doubts that large banks, which dominate the financial sector, are far better capitalized than they were heading into the financial crisis, the final results in March of the Federal Reserve's annual stress test on the United States' 30 largest banks demonstrate both a lack of robustness on the part of some large lending institutions--including  Citigroup (C)--as well as the clear presence of a prominent headwind in the form of elevated compliance, regulatory, and legal costs across the industry.


A Low-Cost, Currency-Hedged International-Bond ETF
Jul. 04, 2014 - Morningstar, Inc. -  While investing in international-bond funds can help diversify credit and interest-rate risk, high fees and currency risk can diminish their appeal.  Vanguard Total International Bond ETF (BNDX) attempts to address these problems.

Currency Hedging Makes International Bonds Easier to Own
Jul. 03, 2014 - Morningstar, Inc. -  It isn't uncommon for investors to diversify their stock holdings abroad. Sure, currency fluctuations can make international equities a bit riskier than their domestic counterparts, but they do not significantly alter the risk profile. In contrast, currency risk can make international bonds significantly more volatile than U.S. bonds. For example, over the past decade, the Barclays Global Aggregate Ex USD Index was more than twice as volatile as the Barclays U.S. Aggregate Bond Index. Currency movements can dominate international-bond funds' performance in the short term. This often makes them more suitable as a bet against the U.S. dollar than as a way to share in the bond returns foreign investors enjoy. Hedging currency risk can solve this problem.

This Fixed-Income ETF Has Its Trade-Offs
Jun. 27, 2014 - Morningstar, Inc. -  Traditional market-capitalization-weighted bond indexes get a lot of flak for assigning the largest weights to the most-heavily-indebted issuers. For instance, it may not be optimal for investors to hold more  General Motors (GM) debt just because GM needs to raise more money. Market-cap-weighted equity indexes share this potential drawback. 

Making Contrarian Investing Work
Jun. 25, 2014 - Morningstar, Inc. -  I have always admired contrarians. It isn't easy to think and act independently. Clients evaluate professional managers' performance against a benchmark, often over short windows. Those who underperform for a few years risk losing their clients, even if their investments ultimately pay off. That makes it difficult for many managers to make bold bets. Investing mistakes may also be easier to swallow when everyone is in the same boat. There is comfort in conformity, but this innate social desire can create opportunities for those who have the courage to think independently.

Passive vs. Active: Debating International Small Caps
Jun. 20, 2014 - Morningstar, Inc. -  An important decision investors make is whether to use an active or passive strategy in a particular segment of their portfolio. Passive investing is popular for more "efficient" areas of the market, but less-efficient areas, like international small-cap stocks, are thought to provide active managers more opportunities for outperformance.

This REIT ETF Remains Prettiest on the Block
Jun. 18, 2014 - Morningstar, Inc. -  REITs have traditionally been viewed as a liquid way to buy commercial real estate and improve a portfolio's diversification, but the sector's investor base has expanded in recent years to include income- and growth-seekers.  Vanguard REIT Index ETF(VNQ) is a well-constructed and cheap way to gain access to the REIT space. Vanguard often offers the same fund in mutual fund and ETF share classes, and this fund's mutual fund share class,  Vanguard REIT Index (VGSIX), receives a Morningstar Analyst Rating of Gold.

J.P. Morgan Begins Its Push Into ETFs
Jun. 17, 2014 - Morningstar, Inc. -  On Tuesday morning, J.P. Morgan Asset Management rolled out its first-ever exchange-traded fund, a passively managed global-equity-oriented strategic beta ETF that tracks an FTSE index and taps four separate return factors.

The Best Fixed-Income Investment
Jun. 11, 2014 - Morningstar, Inc. -  There were 31 short-term bond exchange-traded funds with a combined $60.9 billion in assets as of the end of May. They offer yields ranging from nil, in the case of SPDR Barclays 1-3 Month T-Bill (BIL), to more than 2%, in the case of AdvisorShares Newfleet Multi-Sector Income (MINC). The biggest, Vanguard Short-Term Bond ETF (BSV), yields a little more than 1%.

BlackRock Broadens Its iShares Core Lineup
Jun. 10, 2014 - Morningstar, Inc. -  On June 10, BlackRock announced the doubling in size of its "iShares Core" lineup of building-block exchange-traded funds, which are aimed at offering investors broad, low-cost exposure to certain asset classes.

An ETF for This Lagging Sector
Jun. 06, 2014 - Morningstar, Inc. -  The U.S. biotechnology sector has enjoyed an impressive run during the past decade. The industry has dramatically outperformed the broader market over that time frame and also had a tremendous 2013. Large-cap biotech firms have fueled this rally, as they have scored key drug approvals, reaped strong sales from already-approved drugs, successfully integrated acquisitions, and benefited from a favorable regulatory environment. The sector also has seen valuations surge from merger and acquisition activity, as large pharmaceutical firms have sought to spruce up relatively empty drug pipelines by buying innovation in the form of biotech firms.

An ETF for This Lagging Sector
Jun. 06, 2014 - Morningstar, Inc. -  The U.S. biotechnology sector has enjoyed an impressive run during the past decade. The industry has dramatically outperformed the broader market over that time frame and also had a tremendous 2013. Large-cap biotech firms have fueled this rally, as they have scored key drug approvals, reaped strong sales from already-approved drugs, successfully integrated acquisitions, and benefited from a favorable regulatory environment. The sector also has seen valuations surge from merger and acquisition activity, as large pharmaceutical firms have sought to spruce up relatively empty drug pipelines by buying innovation in the form of biotech firms.

Are Actively Managed Nontransparent ETFs Inching Closer to Reality?
Jun. 04, 2014 - Morningstar, Inc. -  For years, traditional open-end mutual fund managers have shied away from offering their actively managed strategies in an exchange-traded fund wrapper for fear of the SEC's requirement that all actively managed ETFs disclose their underlying holdings daily.

Not All Risk Is Rewarded
May. 30, 2014 - Morningstar, Inc. -  PowerShares S&P 500 High Beta (SPHB) targets some of the riskiest stocks in the S&P 500 Index in an attempt to boost returns during bull markets. However, these stocks will likely lag during market downturns. Investors in this fund should be prepared for a bumpy ride and have a high tolerance for risk. Although it is not suitable as a core portfolio holding, this fund could come in handy for those speculating on a quick rise in prices.

Shrinking Alpha
May. 28, 2014 - Morningstar, Inc. -  Over the past two decades, the share of passively managed equity fund assets has risen. While some lament that passive investors have consigned themselves to merely average returns, the truth is that the average has been pretty good. The return of large-cap U.S. stocks has been about 10% per year on an annualized basis since 1926. This is the baseline upon which we can judge the performance of any U.S.-stock fund. In fact, most of the movement of our funds can be explained by exposure to a broad market index.

Optimism in India
May. 23, 2014 - Morningstar, Inc. -  Investors love a good reform story. Last year, major reforms in Japan and Mexico captured investors' attention. This year, stocks in India and Indonesia have rallied in anticipation that a more business-friendly, reform-minded leader will soon be elected.

A New Frontier for This ETF
May. 21, 2014 - Morningstar, Inc. -  Frontier market stocks, in aggregate, continue to deliver in 2014, even after a very strong 2013. In the year to date, the MSCI Frontier Index is up 16%, far outpacing the MSCI Emerging Markets Index’s return of 4%, and the S&P 500’s 3%. Among the diversified frontier funds, iShares MSCI Frontier 100 (FM) has been the winner in terms of performance and flows in the first four months of 2014--rising 17% and drawing $320 million. And although FM is only 18 months old, it is currently the third-largest frontier market fund, with more than $800 million in assets. 

A Strategy With Literally Fantastic Returns
May. 16, 2014 - Morningstar, Inc. -  The S&P 500 Dynamic VEQTOR Index is a shining example of financial innovation gone wrong. Start with the name: If an investment sounds like it came out of a science fiction novel, it's likely too creative for its own good. Products with futuristic names are targeted at people impressed by the veneer of sophistication. They are rarely good investments.

A Sensible Approach to 'Smart Beta'
May. 14, 2014 - Morningstar, Inc. -  "Smart beta," "alternative beta," "enhanced indexes," "quantamental indexes"--at this point, the list of monikers describing the fast-growing middle of the active-to-passive spectrum extends long enough to put it just a few syllables shy of making a lunar landing. It's an arena that has further blurred the lines between active and passive management (see Exhibit 1), and one which is at the leading edge of the most recent wave of product proliferation within the global exchange-traded products landscape.

Deep Value in the S&P 500 Index
May. 09, 2014 - Morningstar, Inc. -  Most value index funds target the cheaper half of the market, which tends to sweep in a large helping of blend stocks that dilute their value tilts. In contrast, Guggenheim S&P 500 Pure Value (RPV) targets the cheapest third of the S&P 500 Index and weights its holdings by the strength of their value characteristics. This style purity allows investors to add a value tilt to a diversified portfolio with a smaller investment in this fund than its peers would require.

Discipline at the Core
May. 07, 2014 - Morningstar, Inc. -  Investing has always been part art and part science, but leaning more heavily on a scientific approach may help improve consistency. Through fundamental research, a manager may decide to purchase stocks with varying degrees of value, momentum, and market exposure--the elements that appear to drive stock returns. But without directly targeting these dimensions of return, a portfolio's risk and expected return relative to the market can change over time.

Minimize Ownership Complications With This MLP Idea
May. 02, 2014 - Morningstar, Inc. -  Unfortunately, there's no perfect way to own master limited partnerships. It can be a paperwork headache to directly own a diversified group of MLP units, and because of various structural complications, even the best exchange-traded funds and exchange-traded notes have their drawbacks. It's rare for an exchange-traded note to be a viable alternative to an exchange-traded fund that tracks the same asset class, but  UBS E-TRACS Alerian MLP Infrastructure ETN (MLPI) is one of these unusual cases. There's nothing revolutionary about this note: MLPI tracks the same Alerian index as most MLP exchange-traded products and its 0.85% expense ratio is average. 

Hidden Quality in Dividend ETFs
Apr. 30, 2014 - Morningstar, Inc. -  Interest in quality investing has heated up in recent years, triggering the release of new quality-oriented exchange-traded funds. Several respected academics have released papers that aim to quantify quality/profitability's role as a predictive metric. What are arguably the three most important reports have come in quick succession: "Quality Minus Junk" by Clifford Asness, Andrea Frazzini, and Lasse Pedersen; "The Other Side of Value: The Gross Profitability Premium" by Robert Novy-Marx; and "A Five-Factor Asset Pricing Model" by Eugene Fama and Kenneth French. 

What Have They Done to My Index Fund?
Apr. 29, 2014 - Morningstar, Inc. -  Question: When reading fund reports I sometimes find references to float-adjusted, spliced, or composite indexes. What do these terms mean?

Answer: On the surface, the way most index mutual funds and exchange-traded funds work isn't all that complicated. They simply seek to track the performance of a given index by owning the same constituents in the same proportion as the index. Often this is done using market-cap weighting, meaning that the percentage of the portfolio allocated to each security is in proportion to its size relative to the other holdings. For a mutual fund or ETF that tracks a market-cap-weighted equity index, such as the S&P 500, a company whose market cap represents 5% of the index's total market cap would make up 5% of the portfolio.


Yield Sucker Bet
Apr. 25, 2014 - Morningstar, Inc. -  There are good and bad ways to achieve one's income targets. The good way takes into account risk and total return. The bad way ignores risk and focuses on income at the expense of total return.

A year ago, bond closed-end funds as a whole were a bad way to get income. They were trading at the highest premiums in at least 15 years. Then-Federal Reserve chairman Ben Bernanke's "taper talk" last May sent yields up and shook lots of investors out of anything that had a whiff of duration, including CEFs. Discounts have remained relatively wide since.



Understanding Intrinsic Value
Apr. 23, 2014 - Morningstar, Inc. -  The main tasks of the active value investor are to estimate intrinsic value, buy assets trading at sizable discounts to their estimates, and sell or avoid those trading at premiums. The assumption is that asset prices can't help but gravitate to their fair values over time. However, history shows that prices can become untethered from fair value for years at a time and move in self-fulfilling cycles of fear and greed. A full account of investing needs to acknowledge and manage these short-term movements, but the beating heart of investing should always be fair value.

Be Cautious With Emerging-Markets Dividend ETFs
Apr. 18, 2014 - Morningstar, Inc. -  Investors are dipping back into emerging-markets stocks. In March 2014, flows into diversified emerging-markets open-end funds and exchange-traded funds turned positive after four consecutive months of outflows. Fundamentals in emerging markets have not necessarily improved, but investor sentiment has. According to the Bank of America Merrill Lynch Fund Manager Survey for April, 55% think emerging markets are undervalued, up from 49% in March. More interestingly, only 2% indicated a desire to underweight emerging markets, down sharply from 21% in March.

A Low-Volatility Approach to Emerging Markets
Apr. 16, 2014 - Morningstar, Inc. -  iShares MSCI Emerging Markets Minimum Volatility (EEMV) is suitable for use as a small core holding in a diversified portfolio and is a solid alternative to a cap-weighted emerging-markets index fund. This fund tracks an index that selects about 200 stocks from its parent index (the MSCI Emerging Markets Index) to form a low-volatility portfolio. Low-volatility strategies seek to exploit the observed phenomenon that portfolios with smaller price fluctuations tend to outperform portfolios with larger price fluctuations over the long term.

A Defensive-Stock Fund for Risk-Averse Investors
Apr. 11, 2014 - Morningstar, Inc. -  Low-volatility equity strategies were all the rage two years ago. Investors were looking to tiptoe back into the equity market but could not stomach the volatility, and two newly minted exchange-traded funds were happy to meet the demand.  IShares MSCI USA Minimum Volatility (USMV) and  PowerShares S&P 500 Low Volatility (SPLV) raked in $6 billion in the year through April 2013. Those strong flows came at a time when overall demand for equities was tepid. The organic growth rate for large-blend funds was only about 2% during that period. Since that time, the broad equity market has rallied, and investors have pulled $3 billion out of the low-volatility funds while ramping up investment in the broader equity market. While these funds should lag during bull markets, they may pay off during market downturns. Investors who try to chase performance are likely to be disappointed.

Survivorship Bias
Apr. 09, 2014 - Morningstar, Inc. -  Many funds that were around 20 years ago no longer exist. Not surprisingly, the funds that closed tended to have relatively poor performance. Fund companies have a habit of merging losers with better-performing funds, which allows them to keep their clients' assets and mask poor performance.

Partying Like It's 1999
Apr. 04, 2014 - Morningstar, Inc. -  Morningstar's Take
As United States equities continue to hit all-time highs, one of the dynamics capturing plenty of attention in recent weeks has been initial public offerings of high-tech companies and, in particular, Internet firms, such as "Candy Crush Saga" game maker King Digital Entertainment (KING), which went public last week, and Chinese Internet colossus Alibaba Group, which is preparing to list in the U.S.

Consumer Discretionary Stocks: The Winter of Discontent
Apr. 02, 2014 - Morningstar, Inc. -  Since the start of the year, the United States equity sector that has underperformed the most has been the consumer discretionary sector.

While the U.S. stock market's performance has been slightly better than flat for the year, consumer discretionary names have been battered during the past three months. The weakness has come across many different consumer discretionary subsectors, including media, online retail, and traditional retail.


Capital Destruction, Inc.
Apr. 01, 2014 - Morningstar, Inc. -  Share prices of the two biggest mortgage real estate investment trusts, Annaly Capital Management (NLY) and American Capital Agency(AGNC), are down more than 30% since last April. Both firms, as of this writing, offer double-digit yields and are buying back shares. Insiders have been buying, too.

Fool's Gold?
Mar. 28, 2014 - Morningstar, Inc. -  Market Vectors Gold Miners ETF (GDX) came strong out of the gate in 2014, after posting three consecutive years of negative returns--declining nearly 66% in aggregate from 2011 through 2013. Is it finally gold miners' time to shine? With a current price/fair value ratio of 0.83, GDX is currently the cheapest of all of the exchange-traded funds for which we calculate this metric. But is there real value here, or are miners stocks just fools' gold? Here's the acid test on GDX.

One of the Most Useful ETF Data Points You May Never Have Heard Of
Mar. 26, 2014 - Morningstar, Inc. -  Morningstar's fair value estimate for exchange-traded funds leverages the bottom-up fundamental analysis produced by our global team of equity research analysts, distilling their extensive work into one powerful metric of the estimated intrinsic value of a portfolio of stocks.

One of the Most Useful ETF Data Points You May Never Have Heard Of
Mar. 26, 2014 - Morningstar, Inc. -  Morningstar's fair value estimate for exchange-traded funds leverages the bottom-up fundamental analysis produced by our global team of equity research analysts, distilling their extensive work into one powerful metric of the estimated intrinsic value of a portfolio of stocks.

Our equity analysts evaluate stocks for what they truly are--pieces of a business. Instead of prognosticating short-term price movements or momentum, our analysts focus on determining the value of a business, its risks, and whether the stock price accurately reflects both the value and risk. This philosophy of fundamental research is the foundation for our valuation model. We believe that:

The Buyback Fund
Mar. 21, 2014 - Morningstar, Inc. -  Ordinarily, an index fund that charges anything close to an active management fee would not be competitive. Yet, despite its 0.71% expense ratio, PowerShares Buyback Achievers (PKW) has amassed more than $2.5 billion in assets. That is likely due to its impressive performance record. From its inception in December 2006 through February 2014, the fund outpaced the S&P 500 Index by nearly 2.9% annualized, net of fees. Yet, its strategy is simple. The fund targets U.S. stocks that have reduced their shares outstanding by at least 5% in the previous year and weights these holdings by market capitalization, subject to a 5% cap. This results in a portfolio of quality, shareholder-friendly companies that may continue to generate attractive returns.

The Default Portfolio
Mar. 19, 2014 - Morningstar, Inc. -  Investing can seem like a daunting task. But low-cost index funds make it easy for the average investor to do better than he would with most professionally managed offerings, after fees. A broad-market index reflects the collective portfolio of all market participants and their view on the value of its holdings. In order for one investor to beat the market, someone else must underperform. Competition for superior performance creates a reasonably efficient market that is tough to consistently beat without taking on greater risk. The average actively managed dollar must underperform the average passively managed dollar because it incurs higher fees and, in aggregate, active investors define the market portfolio (1). 

Buffett's Latest Letter
Mar. 18, 2014 - Morningstar, Inc. -  Warren Buffett's latest letter to shareholders of  Berkshire Hathaway (BRK.B) came out on March 1. It's excellent. Every serious investor should read the whole thing. I've pulled out a few interesting nuggets to elaborate upon

High Quality, High Fees
Mar. 14, 2014 - Morningstar, Inc. -  Investors have plenty of options when it comes to dividend exchange-traded funds. These funds follow a variety of strategies: Some focus on high income, some on total return, others on quality, and some focus on a combination of all three. One interesting choice is  First Trust Value Line Dividend Index (FVD), a low-volatility dividend strategy ETF that uses proprietary research by Value Line to construct its portfolio. Although "dividend" is in the fund's name, its most attractive qualities are its relative stability, emphasis on quality stocks, and significant value tilt. 

Understanding Securities Lending in ETFs
Mar. 12, 2014 - Morningstar, Inc. -  A well-run index fund is typically characterized by its ability to effectively track its index, lagging only by the amount of its expense ratio. In theory, it should not be possible for an index fund to come any closer to its benchmark's return--but some do, including funds that utilize full replication of their index's holdings. A handful of funds even beat their benchmark while perfectly replicating its holdings. How can this be? In many cases, this is an example of securities lending at work.

Look to Africa for Faster Growth
Mar. 07, 2014 - Morningstar, Inc. -  The top holdings of  iShares MSCI South Africa Index (EZA) are primarily well-run financial services, telecom, and consumer firms, many of which have operations across different African markets. As such, this exchange-traded fund can be used to gain exposure to healthy growth trends on the African continent. It is one of only a few funds to focus on this region. This ETF can also be used tactically to add South African exposure to a diversified portfolio--South African stocks account for about 7% of the value of the MSCI Emerging Markets Index. 

Where Are the Opportunities in Emerging Markets?
Mar. 05, 2014 - Morningstar, Inc. -  Last month, I wrote an article entitled Are Emerging Markets Cheap? to shed some light on some of the assumptions that underlie the opinion that emerging markets are trading at attractive valuations. As a follow-up, and to address a number of reader requests, this article will focus on investment ideas in emerging markets. First, I will take a look at emerging-markets fund managers' recent purchases for some investment ideas that can be executed via exchange-traded funds. 

Vanguard Announces Lower Expense Ratios for 5 International-Stock ETFs
Mar. 03, 2014 - Morningstar, Inc. -  Last week, Vanguard revealed that expense ratios for five large exchange-traded funds had fallen between 5% and 20%, depending on the ETF.

All of the affected ETFs, which already were the lowest-priced or second-lowest-priced options in their respective categories, are devoted to international equities. And with the cuts, all of the funds now either rank as the lowest-cost option in their category or are in a tie for being the lowest-cost option in their respective category.

The Good, the Bad, and the Ugly
Feb. 28, 2014 - Morningstar, Inc. -  As an observer of the exchange-traded fund business, I see a lot of folly. While I find the genre of "best" or "worst" list articles to be regrettable, I'm writing one because I hope to prod readers, both individual investor and industry insider alike, in the right direction.

Understanding Factor Models
Feb. 26, 2014 - Morningstar, Inc. -  Yesterday, I briefly explainedthe three major risk factors that determine most assets' behavior: economic growth, inflation, and liquidity. These three ingredients are why stocks, bonds, and many alternative strategies have higher expected returns than cash.

An Opportunity in a Fairly Valued U.S. Equity Landscape
Feb. 21, 2014 - Morningstar, Inc. -  U.S. stocks have little to show for themselves thus far in 2014, with the S&P 500 Index posting a slightly negative return (negative 0.8% as of this writing). However, after U.S. equities' tremendous gains in 2013, Morningstar's equity analysts consider the U.S. stock market to be fairly valued. The S&P 500 Index currently trades at a price/fair value of 1.01, while Morningstar's coverage universe is trading at a price/fair value of about 1.03.

To Hedge or Not to Hedge?
Feb. 19, 2014 - Morningstar, Inc. -  Currency-hedged exchange-traded funds have come into vogue of late. Investors' interest has been piqued by the recent performance of the oldest and largest of them all:  WisdomTree's Japan Hedged Equity (DXJ). DXJ gained nearly 42% in 2013, as a massive dose of monetary stimulus contributed to an 18% decline in the value of the Japanese yen and steady improvement in the global economy gave Japan's stock market an additional shot in the arm. Meanwhile,  iShares MSCI Japan ETF (EWJ)--which does not hedge its yen exposure--increased by 26% in calendar 2013. 

Adding Some Gangnam Style to Your Portfolio
Feb. 14, 2014 - Morningstar, Inc. -  The South Korean market may be described as having somewhat of a split personality. South Korea is still considered an emerging market by index provider MSCI but is classified as a developed market by its close competitors in the index arena, FTSE and S&P. Many South Korea firms are export-oriented, with customers in both the emerging and developed markets. So it is not surprising that the South Korean market can sometimes march to its own beat.

Are Emerging Markets Cheap?
Feb. 12, 2014 - Morningstar, Inc. -  Emerging-markets stocks are typically viewed as an asset class offering the potential for higher, albeit volatile, returns, and as a source of diversification. While these traits may still generally hold, this asset class has evolved significantly over its relatively short life span, so any analysis of current valuations of emerging markets should be viewed in this context.

What I Learned From Ray Dalio
Feb. 11, 2014 - Morningstar, Inc. -  I try to learn from the best. Ray Dalio is one of them. He founded Bridgewater Associates, one of the biggest hedge funds in the world. Many retail investors have not heard of him, probably because his funds are open only to big institutions. It's a terrible mistake to limit yourself to listening only to the musings of mutual fund managers. Doing so means that you will ignore many of the best investors.

Bonds as the Ballast
Feb. 07, 2014 - Morningstar, Inc. -  After a blockbuster year for stocks and concerns about rising interest rates, some investors might be entertaining the idea of ditching their bond holdings. We've all heard the argument, "interest rates can't go much lower." Fair enough. And while interest rates have inched up since the summer of 2013, they are still close to historic lows. I can't tell you whether rates will continue their move higher by the summer, year-end, or 2016. But I can tell you that bonds play a critical role in a balanced portfolio.

Howdy, Partner
Feb. 05, 2014 - Morningstar, Inc. -  Even as the exchange-traded fund industry has matured, many large traditional fund managers have remained on the outside looking in. The core cadre of ETF providers has changed little over the past few years, and much of the activity from the more traditional fund managers has involved their applications to issue actively managed ETFs. For the most part, brand-new issuers whose first ETFs have started trading have been small fries. And many traditional managers have applications pending to issue actively managed ETFs. Whether players such as Dreyfus, John Hancock, Neuberger Berman, T. Rowe Price, Principal, and Eaton Vance, for example, ever actually start issuing actively managed ETFs might be an open question, but all (along with many others) have placed serious proposals to do so before the SEC.

Should You Consider a Convertible-Bond ETF?

Jan. 31, 2014 - Morningstar, Inc. -  One of the fastest-growing exchange-traded funds may come as a surprise:  SPDR Barclays Capital Convertible Securities (CWB), the only convertible-bond ETF. Convertible bonds are a niche asset class with an estimated market cap of less than $500 billion and are traditionally considered the purview of active managers. Only a handful of convertible-bond mutual funds and closed-end funds exist. Nonetheless, CWB almost doubled in size over the past year to more than $2 billion in assets, making it the third-largest convertible-bond fund of any kind. CWB is the sole passively managed option and is worth a look by investors searching for an asset class that can offer compelling risk-adjusted return and some extra yield compared with traditional equity investments.

Active vs. Passive: The REIT Edition
Jan. 29, 2014 - Morningstar, Inc. -  Passive investing is rooted in the efficient-market hypothesis, which questions if active managers are able to consistently generate excess returns over a stated benchmark. Many investors have begun to employ passive strategies in more “efficient” areas of the market, such as U.S. large caps. However, in smaller niches of the market, such as real estate, there is less of a consensus on the active versus passive debate.

Imitation
Jan. 28, 2014 - Morningstar, Inc. -  "I believe in the discipline of mastering the best that other people have ever figured out. I don't believe in just sitting down and trying to dream it all up yourself. Nobody's that smart."--Charlie Munger

In early 2012 I had some cash in my taxable account I wanted to put to work. I had always wanted to be a shareholder of  Berkshire Hathaway (BRK.B), the stock looked cheap, and it didn't pay a dividend. I bought a couple hundred shares over a few days and kept on accumulating through the year.


Low Volatility Abroad
Jan. 24, 2014 - Morningstar, Inc. -  In the context of investing, volatility usually isn't a good thing. Sure, in theory, the market should compensate investors with higher expected returns for accepting greater risk that cannot be diversified, but it hasn't always turned out that way in practice. Historically, the most volatile stocks and bonds have offered the lowest risk-adjusted returns, according to a study by AQR principals Andrea Frazzini and Lasse Pedersen. In other words, incremental increases in risk have not been matched with commensurate improvements in return. More problematically, volatility tends to encourage the perverse tendency that investors have to buy high and sell low. It may also deter investors from adequately diversifying into international stocks.

Does the Small-Cap Premium Exist?
Jan. 22, 2014 - Morningstar, Inc. -  It is intuitive to presume that small-cap stocks should outperform their large-cap counterparts over the long run. After all, small caps do tend to have more limited financial resources, weaker competitive advantages (if any), and lower profitability than large caps. They also tend to be more volatile and have less analyst coverage--which may increase the risk of mispricing. An efficient market should compensate investors for accepting greater non-diversifiable risk with higher expected returns. Consistent with this view, United States small-cap stocks historically have outpaced their large-cap counterparts over the long term.

Best Ideas
Jan. 17, 2014 - Morningstar, Inc. -  I'm often asked about  Market Vectors Wide Moat ETF(MOAT). It puts me in a bit of a pickle. MOAT tracks the Morningstar Wide Moat Focus Index. Any recommendation to invest in it would be rightly perceived as coming from a conflicted party, hence the long disclosure prefacing this article. For what it's worth, I had nothing to do with MOAT's creation and am not compensated in any way by the exchange-traded fund's success or failure. I honestly think MOAT is an interesting strategy that deserves a hard look, and I also happen to be well-placed to do so in an insightful manner.

How Hegemons Fall
Jan. 14, 2014 - Morningstar, Inc. -  Warren Buffett once said, "It's never paid to bet against America." The same could have been said for the United Kingdom before World War I or Rome before Commodus' reign. While extrapolating the historical trend line is actually a pretty good prediction strategy, it's not the way to make money. Fortunes are made (or preserved) anticipating big economic shifts, and successful prediction requires good theory. Buffett admits his expertise is not in timing macroeconomic shifts. Ray Dalio's is. And he thinks the United States is an empire in relative decline.

Taking Stock of the S&P 500 Index
Jan. 10, 2014 - Morningstar, Inc. -  Since 2005, equity investors have put nearly $1 trillion into passive mutual funds and exchange-traded funds while pulling $300 billion out of active funds. Although the Dow Jones Industrial Average may be older and more widely cited, the S&P 500 Index's market-cap weighting makes it closer to the ideal "market portfolio" envisioned in the efficient-market hypothesis. The S&P 500 has become the most popular index that mutual funds and ETFs track. There are 54 distinct mutual funds indexed to the S&P 500 and three ETFs. Of these, only a handful can justify their existence.

Three lessons Learned in 2013 From ETF Fund Flows
Jan. 08, 2014 - Morningstar, Inc. -  U.S.-listed exchange-traded funds attracted $188.4 billion in 2013, just shy of 2012’s record $190.1 billion haul. Those inflows represent a growth rate of about 14% of beginning assets compared with the projected growth of about 3% for long-term mutual funds. Strong inflows, combined with market appreciation, have allowed ETF assets to hit $1.7 trillion, or about 13% of long-term mutual fund and ETF industry assets. Let's take a look at some things we can learn from these strong ETF flows.

Beginner Mistakes
Jan. 07, 2014 - Morningstar, Inc. -  Being competent requires avoiding major mistakes. Yet I see time and time again investors making basic errors while spending a lot of time and effort trying to beat the market. That's like trying to join the NBA without knowing how to dribble the ball--the only difference is the NBA won't let you play, even if you show up to a game wearing a jersey and carrying a bagful of cash. The finance industry and its satellites, on the other hand, are more than happy to take your money.

Vanguard Dominates the Fund Industry Again in 2013
Jan. 03, 2014 - Morningstar, Inc. -  Vanguard continued to dominate the fund industry in 2013. Through the first 11 months, the firm raked in $117 billion of long-term mutual fund and ETF assets compared with $425 billion for the industry. Vanguard has finished first or second in terms of flows in all but two of the past 20 years. This has allowed the firm to increase its market share to 18% from just 8% two decades ago and places it well ahead of rivals Fidelity and American Funds, both of which have lost market share over the past five years.

Moving the Goal Posts
Dec. 24, 2013 - Morningstar, Inc. -  On March 11, 2011, the president of the Federal Reserve Bank of New York, William Dudley, lectured a working-class audience in Queens, New York, on why inflation wasn't a problem. A skeptical audience member asked, "When was the last time, sir, that you went grocery shopping?" The economist, a former Goldman Sachs partner with a Ph.D. from Berkeley, conceded that food and energy prices were rising, but pointed out that overall inflation was still tame. He went on to explain, "Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful."

6 New Bond and Currency ETFs From WisdomTree
Dec. 23, 2013 - Morningstar, Inc. -  Pax World to Exit ETF Business, Merge Socially Responsible ETF Into an Open-End Fund
On Thursday, Dec. 12, Pax World announced that it plans to merge its socially responsible ETF into a newly created open-end mutual fund.

The firm announced that sometime in early 2014, it will merge the $55.5 million Pax MSCI EAFE ESG Index ETF (EAPS) and a Pax open-end mutual fund, the $44.5 million Pax World International Fund (PXIRX), into a newly created fund, to be named Pax World International ESG Index Fund. The new mutual fund will seek returns before fees and expenses that closely correspond to the price and yield performance of the MSCI EAFE ESG Index, which is the index that EAPS has tracked.
 


Drilling for Value
Dec. 20, 2013 - Morningstar, Inc. -  It can be challenging to find attractive investment opportunities in a market that is at (or near) all-time highs. It has been an excellent year for equities, as the S&P 500 Index has soared more than 27% through mid-December. Now, with a price/fair value of 1.01, according to Morningstar equity analysts, the S&P 500 currently appears to be fairly valued.

Some sectors have fared better than others. Taking a step back to view the market through a sector lens reveals that the energy sector has trailed the broader market this year and is currently trading at a 6% discount to Morningstar's fair value estimate. Energy stocks also have the lowest price/earnings, price/sales, and price/cash flow ratios of any equity sector. Along with its attractive relative valuation, the sector is also in solid financial condition. In fact, the energy sector's debt as a percentage of total capital is the lowest of any sector. Yes, that even includes technology stocks.


For ETFs, Capital Gains Distributions Remain Few and Far Between
Dec. 18, 2013 - Morningstar, Inc. -  Tax efficiency is one of the hallmark benefits of exchange-traded funds.

Unlike traditional open-end mutual funds, which redeem shares for cash, requiring funds to sell securities and potentially realize capital gains, most ETFs continually dodge the capital gains tax bullet by redeeming securities in kind. This allows ETF providers to swap out low-cost-basis securities without having to realize as many capital gains.



IShares Rolls Out Actively Managed, Short-Duration ETF
Dec. 16, 2013 - Morningstar, Inc. -  On Friday, Dec. 13, iShares rolled out another exchange-traded fund in its short-duration product suite, unveiling an actively managed ETF that holds short-term bonds and money market instruments and targets an effective duration of less than six months.

IShares Liquidity Income ETF
ICSH is the latest addition to the battery of short-duration ETFs. ICSH is managed by  BlackRock's (BLK) cash management team, which employs fundamental research and analysis of issuers' creditworthiness and valuation to select securities.


The Missing Piece
Dec. 13, 2013 - Morningstar, Inc. -  The Barclays US Aggregate Bond Index has become a widely accepted benchmark for investors seeking broad passive exposure to the U.S. investment-grade bond market. But until recently, there were no index funds that offered similar exposure to international bonds. Investors had to assemble this portfolio piecemeal with separate international government- and corporate-bond funds. More problematically, currency fluctuations have a significant impact on most of these funds' returns and volatility, limiting their ability to diversify credit and interest-rate risk. 

Dividends--A Better Approach to Value?
Dec. 11, 2013 - Morningstar, Inc. -  Low interest rates have encouraged investors to accept greater risk in pursuit of higher yields to make up for lost income. While greater risk tends to accompany higher-yielding assets, a naive strategy of targeting stocks with high dividend yields to generate income would have historically outperformed the broad market, with lower volatility. But this return premium isn't unique to dividend-paying stocks. It's no secret that cheap stocks have historically outperformed their more expensive counterparts over the long run, a phenomenon known as the value effect. Dividend investing is essentially a repackaged value strategy. However, it may offer investors a lower-risk way to harness the value premium than traditional value strategies that rely on a broader range of metrics to identify cheap stocks.

A Noble Lie
Dec. 10, 2013 - Morningstar, Inc. -  A common nugget of wisdom passed down from on high to the masses is to "buy and hold," which really means several things: Set fixed allocations to stocks, bonds, and cash; dollar-cost average into the portfolio with periodic purchases; and, above all, stay the course. I tell investors to do these things all the time, too, because on the whole it's good advice.

It's also a noble lie, an untruth told to investors to keep them from hurting themselves.

Cambria Launches Foreign 'Shareholder Yield' ETF
Dec. 09, 2013 - Morningstar, Inc. -  On Tuesday, Dec. 3, Cambria Investment Management rolled out another exchange-traded fund in its series of "shareholder yield" ETFs, devoted to foreign stocks.

The passively managedCambria Foreign Shareholder Yield ETF (FYLD) is the second ETF that the firm issues, although Cambria also is the subadvisor on the actively managed AdvisorShares Cambria Global Tactical ETF(GTAA). Last week's launch of FYLD follows the $170 million, actively managed Cambria Shareholder Yield ETF (SYLD), which debuted in May and holds U.S. stocks offering significant shareholder yield through dividend payments, share repurchases, and price appreciation. The new foreign shareholder yield fund, however, holds stocks from foreign developed-markets countries and is passively managed. As a result, FYLD tracks a Cambria-managed index of 100 companies with the best combined rank of dividend payments and net stock buybacks. The index also screens for value and quality factors and for companies demonstrating low financial leverage.


Quality Pays Dividends With This ETF
Dec. 06, 2013 - Morningstar, Inc. -  Suitability
The enduring popularity of dividend-strategy funds means exchange-traded funds like  Schwab U.S. Dividend Equity ETF (SCHD) are competing in one of the most crowded areas of the industry. Schwab recently cut this relatively young fund's expense ratio to 0.07%, making it the cheapest dividend ETF available. Its price isn't the only thing that recommends it, however. This dividend-focused ETF targets stable stocks that pay moderate, sustainable income. The resulting portfolio is one of the most quality-oriented among dividend ETFs, with almost all holdings earning either a wide or narrow Morningstar Economic Moat Rating. SCHD's portfolio also has high projected earnings growth relative to competitors and a conservative payout ratio of under 50%. We think this fund is an appropriate core holding for most investors, even in the face of rising interest-rate concerns.

Much Ado About REITs
Dec. 04, 2013 - Morningstar, Inc. -  The lackluster performance of REIT funds this year has been a sharp contrast from their previous market-beating returns since 2009. REIT exchange-traded funds like   Vanguard REIT Index ETF (VNQ) outperformed the S&P 500 in each of the past four years, often by a significant margin. However, year to date through the end of November 2013, REITs have only returned 2.2% compared with  SPDR S&P 500's(SPY) 29% return. It's been a bumpy ride, too, as VNQ's one-year standard deviation was 80% greater than SPY's, which is well above the three-year average difference in volatility. Earlier this year, after the Fed first mentioned that it may scale back its bond-buying program, REITs slid more than 15% between May 20 and June 20.

Losing My Religion
Dec. 03, 2013 - Morningstar, Inc. -  When I first began investing, I caught the passive investing bug bad. The efficient-markets hypothesis, or EMH, was like a divine revelation to me. It was elegant--almost beautiful--and blessed by an impressive-sounding body of authorities. The University of Chicago was my church, Eugene Fama my high priest, and Jack Bogle a saint. He still is, of course.

I’d like to think I wasn’t a blind convert. I had, after all, looked at the data and listened to the experts. As far as I could tell, there was a consensus: Beating the markets is close to impossible. And there was a corollary: Active management is a sin.


ALPS Draws Up Plans for Emerging-Markets 'Dividend Dogs' ETF
Dec. 02, 2013 - Morningstar, Inc. -  On Nov. 22, ALPS filed with U.S. regulators seeking permission to create a passively managed exchange-traded fund that would hold high-dividend-paying stocks from emerging-markets countries.

The proposed ALPS Emerging Sector Dividend Dogs ETFEDOG would be the latest in ALPS' suite of funds that follow the so-called "Dogs of the Dow" theory, which holds that a high dividend yield may indicate that a firm's share price has bottomed out and a rebound is imminent.


Warren Buffett and Time-Horizon Arbitrage
Nov. 27, 2013 - Morningstar, Inc. -  "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." --Warren Buffett

Buffett must have had those words in mind when he and private-equity firm 3G Capital offered to buy out H.J. Heinz Company for a hefty 20% premium to market value. At the time (not too long ago), consumer staples stocks were widely thought to be expensive. Eyebrows were raised, and some went as far as to say he and 3G overpaid. A few months later, he confounded expectations again by agreeing to buy out  NV Energy (NVE) at a 23% premium, again when the consensus was that utilities were expensive.

Targeting Income and Reduced Volatility, Horizons Launches Financials-Sector Covered-Call ETF
Nov. 25, 2013 - Morningstar, Inc. -  On Nov. 18, Horizons rolled out its second exchange-traded fund--a passively managed, covered-call ETF devoted to the financials sector.

The launch of Horizons S&P Financial Select Sector Covered Call ETF (HFIN) comes some five months after the launch of Horizons' first United States ETF, Horizons S&P 500 Covered Call ETF (HSPX).


Chasing Returns in Emerging Markets
Nov. 22, 2013 - Morningstar, Inc. -  PowerShares DWA Emerging Markets Momentum Portfolio (PIE) is currently the only fund to offer a momentum strategy in emerging markets. Momentum strategies seek to capitalize on the phenomenon that securities that have recently outperformed will continue to do so in the short run, and those that have underperformed will continue to lag. This passively managed fund tends to perform best, relative to the cap-weighted MSCI Emerging Markets Index benchmark, when there is a large difference between the best- and worst-performing emerging-markets countries. This fund also does not have some of the drawbacks of a cap-weighted index fund--namely, a consistent, significant exposure to government-controlled entities and global cyclical firms.

Is 'Frontier' the New 'Emerging'?
Nov. 20, 2013 - Morningstar, Inc. -  The performance of emerging-markets stocks has been very disappointing in 2013, due, in part, to taper talk in the United States and slowing growth among many of the high flyers of the last decade, including China and Brazil. Frontier markets, on the other hand, have had a standout year, with the MSCI Frontier Markets Index returning 21.1% in the first 10 months of the year, trouncing the MSCI Emerging Markets Index's return of 0.3%. Aren't frontier markets just less developed emerging markets? Why has there been such a discrepancy in performance?

Fool's Gold
Nov. 19, 2013 - Morningstar, Inc. -  As they are often used, back-tests are merely a legal way of fabricating a statistically bogus history of outperformance and implicitly taking credit for it. I don't think I'm being too cynical. Most back-tested strategies I've seen are problematic. The worst claims are from newsletters and trading-software providers, who can say almost anything without legal repercussions under the aegis of the First Amendment. I've seen claims of "low-risk" 30%-plus monthly returns (or 2,230% annualized), though most typically keep their back-tests in the range of 20%–50% annualized in a sad attempt to maintain a semblance of believability. It appears index providers and exchange-traded fund sponsors have also produced some unbelievable back-tests.

WisdomTree, State Street Draft Floating-Rate Treasury ETFs
Nov. 18, 2013 - Morningstar, Inc. -  Recently, two exchange-traded fund providers submitted paperwork with United States regulators seeking permission to create passively managed ETFs that would track the performance of the U.S. Treasury's floating-rate public obligations.

In January 2014, the U.S. Treasury Department is set to roll out floating-rate securities, which will be its first new product since introducing Treasury Inflation-Protected Securities in 1997. The issuance is aimed at expanding the department's investor base, financing the government at the lowest possible cost over time, meeting continued investor demand for government debt, and dealing with a significant amount of government bonds that are maturing.


A Low-Cost Way to Complete a Large-Cap Portfolio

Nov. 15, 2013 - Morningstar, Inc. -   Vanguard Extended Market Index ETF (VXF) is an ideal supplement to a large-cap portfolio as it is designed to be paired with an S&P 500 Index fund. This fund tracks the S&P Completion Index, which holds virtually every liquid U.S. stock outside of those in the S&P 500 Index.

Filling the gaps in the S&P 500 means that the fund holds a handful of large-cap names that are not in the S&P 500, such as Facebook (FB) and  Las Vegas Sands (LVS). These include companies that don't meet the S&P 500 Index's 50% public float requirement, companies that don't meet the index's domicile requirement, and recent initial public offerings that don't meet its six to 12 month seasoning requirement. The charts below graph the weightings of the largest 3,500 stocks in the S&P 500 and the S&P Completion Index ranked from largest to smallest. A few things stand out when looking at these charts. The first is the skew of the S&P 500 toward mega-cap stocks.

Are Business Development Companies Obscuring the Cost of Your Fund?
Nov. 13, 2013 - Morningstar, Inc. -  In comparing the costs of exchange-traded funds and index funds tracking similar segments of the market, every basis point matters. Making apples-to-apples comparisons of the expense ratios of small-cap ETFs and index funds can be difficult. That's because those funds tracking indexes with even a minuscule weighting in business development companies, or BDCs, are forced to include "acquired fund fees" in their prospectus net expense ratio.

Franklin Templeton Launches First ETF, Targeting Short-Duration U.S. Government Debt
Nov. 11, 2013 - Morningstar, Inc. -  On Tuesday, Nov. 5, Franklin Templeton finally entered the exchange-traded fund space, rolling out an actively managed ETF holding short-duration bonds issued by the U.S. government and related agencies.

Franklin Short Duration U.S. Government ETF 
(FTSD) is the latest actively managed fund to target the short-duration bond market. It's been a popular theme for active fixed-income managers, as stricter money market fund rules have artificially limited yields in short, high-quality debt. Fund firms have seen that portfolio managers can create value by investing in that in-between land that is just beyond money markets' credit-quality and duration limits but too short for most short-duration bond funds.


Our Favorite Tech ETF: A Low-Cost Way to Tap Into Mobile-Computing Growth
Nov. 08, 2013 - Morningstar, Inc. -  Morningstar's Take
As the U.S. stock market has continued its climb in 2013, investors in large- and mid-cap U.S. technology stocks might wonder whether there's much more runway left. Certain technology subsectors, such as Internet and semiconductors, have done very well, while some tech players, such as Apple (AAPL) and IBM (IBM), have underperformed both the sector and the broader market.

The bull case for the U.S. technology sector revolves around companies that have lagged the broader market but are expected to benefit nicely from continued strong growth in mobile computing, such as Apple, Qualcomm (QCOM), and Broadcom (BRCM). These firms all possess structural competitive advantages, economic moats, reasonable valuations, and exposure to mobile computing. Further gains in the tech sector likely will come from companies benefiting from mobile computing, such as these firms.


IPO and Social-Media ETFs Set to Welcome Twitter
Nov. 06, 2013 - Morningstar, Inc. -  It's been a terrific year so far for the United States stock market, but an even better year for U.S. initial public offerings, with IPO volume through the end of September already topping the total IPO volume for all of 2012. As Morningstar equity analyst Jim Krapfel recently noted, there have been 179 offerings versus 131 in 2012, and that also represented an increase from 2011. In fact, offerings are on pace with what took place from 2004 until 2007.

ALPS Launches Energy Infrastructure ETF
Nov. 04, 2013 - Morningstar, Inc. -  On Friday, Nov. 1, ALPS debuted a passively managed exchange-traded fund that holds companies that operate in the North American energy infrastructure sector.

ALPS Alerian Energy Infrastructure ETF (ENFR) tracks an Alerian index of 30 companies headquartered or incorporated in the United States and Canada that operate in the midstream energy space. Alerian structures the index so that certain categories of issuers comprise specific weightings in the index. As a result, midstream energy infrastructure master limited partnerships make up 25% of the index, U.S. MLP affiliates comprise another 30%, Canadian MLP affiliates make up another 10% of the index, U.S. energy infrastructure and power companies comprise 15% of the index, and Canadian energy infrastructure firms make up the remaining 20% of the index. Then, Alerian equally weights companies within their categories. The index contains 30 securities.


Once Again on Top
Nov. 01, 2013 - Morningstar, Inc. -  On Sept. 3, 2013, a deposed monarch was crowned again. Few took notice, as his domain is the still tiny realm of actively managed ETFs. On that day,  PIMCO Enhanced Short Maturity ETF (MINT) unseated its younger sibling,  PIMCO Total Return ETF (BOND), to retake its throne as world's largest actively managed ETF.

Though a minor drama, it's part of a bigger movement by investors to reduce their bond-duration risk. Ben Bernanke kicked off the process when he mentioned during a question-and-answer session that the Fed might "taper" its bond purchases later in the year (which didn't happen). The news that Uncle Ben's helicopter drops of money might slow down earlier than expected sent investors stampeding out of bonds. Faced with capital losses on rising rates and zero yields in cash, some have compromised by piling into ultra-short-duration bond funds, until recently a sleepy backwater of the fund world.


Active ETFs Wait for Their Heyday
Oct. 30, 2013 - Morningstar, Inc. -  As a fan of the Chicago Cubs, I am all too familiar with the spring mantra: "This is our year." So, as someone who is also charged with analyzing the exchange-traded funds industry, I wince when I hear talk of the "year of the active ETF." Each of at least the past three years has been heralded as such by the financial media and industry watchers (including Morningstar). But there is no doubt that the active-ETF space has been long smoke and short fire with a few notable exceptions. I've examined the current crop of actively managed ETFs and highlight the characteristics that are hallmarks of a fund worthy of your investment.

Fidelity Launches 10 U.S. Equity Sector ETFs
Oct. 28, 2013 - Morningstar, Inc. -  On Oct. 24, Fidelity rolled out its long-awaited batch of 10 passively managed, U.S. equity sector exchange-traded funds.

Tracking MSCI indexes and subadvised by BlackRock, the new ETFs are managed by Fidelity's new SelectCo unit. Most notably, the new ETFs launched with the lowest expense ratios of any equity sector ETFs available--just 0.12%. That undercuts both Vanguard, which offers many of its equity sector funds for 0.14%, and State Street, whose SPDR sector funds cost 0.18%.

An Attractive European ETF for Intrepid Investors
Oct. 25, 2013 - Morningstar, Inc. -  Europe is fraught with risk. Unemployment is close to 11%, fiscal imbalances in Spain and Italy threaten to drag down the rest of the eurozone, and austerity measures could keep demand soft for years. Yet, recent Markit Purchasing Manager Index data suggests that the region is starting to stabilize. Macroeconomic news is typically quickly incorporated into stock prices. However,  Vanguard FTSE Europe ETF (VGK) is one of the best options for investors who believe that this nascent recovery will gain traction. While not for the faint of heart, its holdings are trading at reasonable valuations and may grow faster than their U.S. counterparts as conditions in Europe improve.

IShares Launches 2 Short-Duration Corporate-Bond ETFs
Oct. 21, 2013 - Morningstar, Inc. -  With an eye toward what widely are expected to be higher interest rates in the future, iShares on Thursday debuted two passively managed exchange-traded funds that hold corporate bonds with between zero and five years left to maturity.

IShares 0-5 Year Investment Grade Corporate Bond ETF (SLQD) and iShares 0-5 Year High Yield Corporate Bond ETF (SHYG) both track Market iBoxx indexes, but they are different in that one holds investment-grade corporates while the other holds high-yield corporates. Both are shorter-duration versions of iShares' popular pair of longer-duration corporate-bond funds,  iShares iBoxx $ Investment Grade Corporate Bond ETF(LQD) and  iShares iBoxx $ High Yield Corporate Bond ETF(HYG), which target the entire duration spectrum for their respective corners of corporate debt.


The Academic Commodity ETF
Oct. 18, 2013 - Morningstar, Inc. -  Strategies that eschew traditional market-cap weighting are the current trend in exchange-traded funds. Funds that use fundamental indexing or other rules-based weighting methodologies are popping up in almost every sector. In the commodities space, there's  United States Commodity Index (USCI), which launched in 2010 and uses market-price signals to construct its index. Most commodity indexes weight by consumption or production, but USCI's strategy is based on research by academics Geert Rouwenhorst and Gary Gorton. In a 2007 paper, Rouwenhorst and Gorton found that the futures contracts of commodities with low inventory consistently outperformed those of commodities with high inventory.

Assessing Dividend ETFs in a Rising-Rate Environment
Oct. 16, 2013 - Morningstar, Inc. -  Despite the Federal Reserve's pullback on its tapering plans, investors remain spooked by the prospect of rising rates this Halloween season. Fixed-income investors aren't the only ones with cause to worry; dividend exchange-traded funds, a popular strategy during the recent years of record low rates, are also sensitive to rate increases. Dividend ETFs are not made equal, however. Their portfolios can vary widely from strategy to strategy depending on the methodologies of the indexes they track. Two of the largest dividend-strategy ETFs,  Vanguard Dividend Appreciation ETF (VIG) and  iShares Select Dividend (DVY), have such different methodologies that only 17% of their portfolios overlap.

A New Blue-Chip-Themed 'Dividend Aristocrats' ETF From ProShares

Oct. 14, 2013 - Morningstar, Inc. -  On Thursday, Oct. 10, ProShares rolled out a passively managed ETF that holds the 54 companies in the S&P 500 Index that have raised their dividend payments each year for the past quarter-century.

The equally weightedProShares S&P 500 Aristocrats ETF (NOBL) tracks the S&P 500 Dividend Aristocrats Index, a benchmark aimed at offering investors some measure of income along with quality, as dividend increases are considered a measure of a company’s financial strength. The index places a 30% cap on the exposure of any one sector to ensure diversification.


ETFs Enjoy Strong Flows in the Third Quarter
Oct. 09, 2013 - Morningstar, Inc. -  Exchange-traded funds garnered $53 billion in net inflows during the third quarter of 2013. This is despite the fact that it was an extremely volatile three-month stretch that included the largest month of ETF outflows on record in August. The flows were driven by investor interest in equity funds, as U.S. equity funds brought in $22 billion while international-stock ETFs brought in $21 billion. A rebound of flows in September allowed the taxable-bond category to eke out a net increase for the quarter, but selling off municipal-bond ETFs continued unabated. Selling within the precious-metals category pressured the commodities category group, although the pace of selling slowed from the second quarter. For the year to date, ETF flows are slightly behind last year’s record-breaking pace. While equity fund inflows are ahead of last year's, bond funds are off pace and commodity exchange-traded products have experienced net redemptions.

Low-Hanging Fruit
Oct. 09, 2013 - Morningstar, Inc. -  Investing is a lot like harvesting fruit from a tree. The typical investor, overconfident, ignores the smallish, plain but certain fruit dangling within his grasp. He’d rather clamber up the tree in search of bigger, sweeter fruit. So up he climbs, joining the other would-be fruit-pickers. More often than not, they all end up on a narrow branch that can’t support their weight. And they fall.

Deutsche Bank Launches 3 Overseas Hedged Equity ETFs
Oct. 07, 2013 - Morningstar, Inc. -  On Tuesday, Oct. 1, Deutsche Bank rolled out three more currency-hedged equity exchange-traded funds devoted to foreign markets.

Borrowing a page from the playbook of WisdomTree, whose  WisdomTree Japan Hedged Equity (DXJ) this year has attracted tremendous investor interest, Deutsche Bank now has debuted hedged equity ETFs devoted to the United Kingdom, Europe, and areas of Asia outside of Japan. In some respects, the trio of new ETFs suggests that Deutsche Bank is following something of a copycat strategy relative to WisdomTree, given that the firm recently launched WisdomTree United Kingdom Hedged Equity (DXPS) and since 2010 has issued WisdomTree Europe Hedged Equity (HEDJ).



An ETF for China's Next Act
Oct. 04, 2013 - Morningstar, Inc. -  It's been hard for investors to make money in China over the past few years. After a decade of 9%-10% annual gross domestic product growth, driven by exports and fixed-asset expenditures, China is facing a new normal: weaker external demand for exports and slowing infrastructure spending. Another significant concern over the past few years has been uncertainty regarding the stability of China's financial system, which includes the banking and property industries. All of these issues have weighed heavily on the performance of Chinese equities.

Morningstar Announces 2013 Awards for Best U.S. ETFs and ETF Providers
Oct. 03, 2013 - Morningstar, Inc. -  Morningstar is pleased to announce the winners of its second-annual Morningstar Awards for ETFs. These awards recognize fund families for providing low-cost, index-based investments and are based on the number of winners in each category group. This year, iShares won three ETF Provider awards while Vanguard won one. At the category level, iShares had 31 category winners, Vanguard had 23, and SPDR had 10. PowerShares, Schwab, WisdomTree, First Trust, and Guggenheim also had category winners.

Get Direct Exposure to Emerging-Markets Consumers With This ETF
Oct. 02, 2013 - Morningstar, Inc. -  There is a lot to like about  EGShares Emerging Markets Consumer (ECON). This fund invests in 30 large-cap consumer services and consumer goods firms domiciled in the emerging markets (which in this case excludes Taiwan and South Korea). Many of these companies, such as Brazilian brewer and soft drink company  AmBev(ABV), Mexican convenience store operator and coke bottler  FEMSA (FMX) and Russian grocery chain Magnit are well-run, market-dominating companies with industry-leading profit margins. 

WisdomTree Launches Emerging-Markets Consumer Growth ETF
Sep. 27, 2013 - Morningstar, Inc. -  On Friday, Sept. 27, WisdomTree rolled out the latest passively managed exchange-traded fund devoted to offering exposure to the emerging-markets consumer.

ETF sponsors continue to launch funds that hold companies that would benefit as incomes rise in emerging-markets countries. As a result, we have seen a steady stream of new ETFs that either hold small-cap companies from emerging markets (which by definition focus more on their respective domestic markets) or that hold consumer-oriented companies from those regions.


A Better MLP Mousetrap?
Sep. 27, 2013 - Morningstar, Inc. -  Master limited partnerships, especially the kind that owns pipelines and other oil- and gas-related infrastructure, have high yields and tax-deferred distributions. These partnerships are also fairly stable entities, as many of them operate as regional monopolies. Unfortunately, there's no perfect way to buy MLPs. Owning individual MLPs requires investors to file cumbersome K-1s, and placing MLPs in tax-advantaged accounts can cause even further tax headaches. One way to avoid K-1s is to invest in an MLP fund. MLP funds handle K-1s for investors and send a standard 1099 during tax season, but the convenience comes at the price of an additional layer of taxation. Ideally, an exchange-traded fund would be able to invest exclusively in MLPs and remain a pass-through vehicle. 

The Quintessential U.S. Equity ETF
Sep. 25, 2013 - Morningstar, Inc. -  Vanguard Total Stock Market (VTI) is our favorite equity exchange-traded fund for passive exposure to the U.S. stock market, as it provides the broadest possible exposure for the incredibly low cost of 0.05%, or $5 for every $10,000 invested. While  SPDR S&P 500 (SPY) may attract more trading volume, it is not the best choice for broad exposure to the U.S. market. Because large-cap stocks dominate the S&P 500 Index, SPY does not include most mid-caps or any small-cap and micro-cap stocks. In contrast, VTI invests in most liquid U.S. stocks, sweeping in more than 3,500 holdings across the market-cap spectrum. Over the long run, small-cap stocks tend to outperform their larger counterparts. This may partially explain why VTI has generated a slightly higher annualized return during the past 10 years (8.04%) than SPY (7.23%).  

Calamos Proposes Actively Managed, 'Select Growth' ETF
Sep. 23, 2013 - Morningstar, Inc. -  In June, Calamos Investments filed with U.S. regulators seeking approval to create actively managed exchange-traded funds and indicated that its first actively managed ETF would be Calamos Focus Growth ETF.

Now, Calamos has altered its plans with an updated filingthat is proposing that its first actively managed fund would beCalamos Select Growth ETF.


Homebuilders and the Fed: An ETF for Investors Seeking Housing-Sector Exposure
Sep. 20, 2013 - Morningstar, Inc. -  Following the surprise news that the Federal Reserve will continue with its easy-money policy and not taper its bond-buying program, interest rates fell across the board on Wednesday, with rates reversing some of their recent rises and the 30-year mortgage rate settling in around 4.5%, or 10 basis points less than it had been a week earlier. Since May, the 30-year mortgage rate has risen more than 100 basis points, and mortgage rates still are much higher from their all-time lows earlier this year. Still, Wednesday's news from the Fed was great news for the equity markets, with the S&P 500 Index rising 1.2% on Wednesday.

Beyond Income: Examining Popular New ETF Launches and Their Underlying Strategies
Sep. 18, 2013 - Morningstar, Inc. -  With United States equity markets near record highs, the U.S. economy regaining strength, unemployment slowly declining, and interest rates finally on the rise, investors sit at something of a crossroads.

U.S. equity market valuations are expensive, but interest rates remain near historic lows. For investors with cash on their hands, these are daunting times. What are some of the more compelling investment opportunities available to investors? One possible source of ideas comes from recent exchange-traded product launches, which continued unabated, as ETP providers have debuted 100 ETPs in 2013 alone.

IShares Targets Retirement Market with 4 Proposed Actively Managed Fund of Funds ETFs
Sep. 16, 2013 - Morningstar, Inc. -  
On Sept. 6, iShares unveiled plans for a quartet of proposed, actively managed, exchange-traded funds that would join its low-priced line of "core" ETFs.
 
IShares filed with U.S. regulators for permission to create the four fund of funds ETFs, which would have varying risk profiles and thus be target-risk funds. The proposed ETFs would hold other iShares ETFs--including other iShares "core" ETFs--and seem aimed squarely at the retirement market.

The New Dow Jones Industrial Average
Sep. 13, 2013 - Morningstar, Inc. -  Since its inception in 1896, the Dow Jones Industrial Average has served as a barometer of the U.S. stock market by tracking a select group of the country's industrial leaders. Earlier this week, S&P Dow Jones Indices announced that  Visa (V),  Nike (NKE,) and  Goldman Sachs (GS) will replace  Hewlett-Packard (HPQ),  Alcoa (AA), and  Bank of America (BAC) in this iconic index, effective Monday, Sept. 23. Because the index weights its constituents by their share price, rather than by market capitalization, these changes will have a significant impact.

For TIPS, Shorter Is Better
Sep. 04, 2013 - Morningstar, Inc. -  Thanks to several years of historically low rates, funds like  iShares Barclays TIPS Bond (TIP) have been the most popular exchange-traded way to invest in Treasury Inflation-Protected Securities. However, with rates increasing and subdued inflation expectations, long-duration ETFs like TIP may no longer be the best choice for most investors. Broad TIPS ETFs such as TIP are highly sensitive to interest-rate changes, are a poor inflation hedge, and protect against unexpected inflation over a time period that might be too long for most. Investors worried about rising rates should consider targeting the short end of the curve instead. Shorter-duration TIPS funds are less exposed to interest-rate risk, and are also slightly more correlated to inflation than their longer-dated brethren. 

Hidden Value in Small-Cap Dividends
Aug. 30, 2013 - Morningstar, Inc. -  Holdings can say a lot about a fund's investment style, but they don't always tell you everything. Take  WisdomTree SmallCap Dividend (DES) for example. It invests in dividend-paying small-cap companies that meet certain liquidity requirements. It then weights them by the dollar value of dividends they are expected to pay out over the next year. While its holdings skew toward the small-value side of the Morningstar Style Box, on average they trade at richer valuations than the holdings of its peers, which explicitly target small-value stocks (see the Portfolio Characteristics table below). Yet, since its inception in July 2006, DES has behaved like a deeper value fund than nearly all of its peers.

The Hidden Risk of Investing in Stable Companies
Aug. 28, 2013 - Morningstar, Inc. -  Fear of rising interest rates has a lot of investors on edge, to say the least. Clearly, rising interest rates are bad for bond and equity investors. It's easy to reduce interest-rate risk in a bond portfolio because interest-rate sensitivity, or duration, is directly related to the timing of cash flows. Bond investors can cushion the blow of rising rates by swapping out long for short duration bonds. But for investors who want to stick with stocks in a rising interest-rate environment, the options for reducing interest-rate risk are less clear. While some investment styles may help limit the damage the Fed can inflict on your portfolio, it's important not to lose sight of the big picture.

First Trust Launches International Multi-Asset Diversified Income ETF
Aug. 26, 2013 - Morningstar, Inc. -  After its successful launch of a passively managed exchange-traded fund that holds a range of income-paying securities from the United States across a mix of asset classes, First Trust on Friday rolled out a similar ETF devoted to international income-paying securities.

First Trust International Multi-Asset Diversified Income Index Fund YDIV is the international version of the U.S.-focused First Trust Multi-Asset Diversified Income Index Fund (MDIV), which began trading in August 2012 and now has close to $500 million in assets.

Another Buffett-in-a-Box?
Aug. 23, 2013 - Morningstar, Inc. -  "Quality" is one of those slippery investment terms. Who doesn't love high-quality companies, of course run by able managers and bought at low prices? I admit I've added to the confusion by using the word inconsistently or imprecisely myself. At its worst, quality simply becomes indistinguishable from "good." The most logical and useful definition I know of is Warren Buffett's concept of the economic moat, a durable competitive advantage that allows a firm to reap above-average returns on its capital even when faced with aggressive competitors. Quality stocks have wide moats; they're insulated from the ravages of creative destruction. 

The Science of Investing
Aug. 21, 2013 - Morningstar, Inc. -  Though it sometimes is hijacked by ideologues, the scientific method works. The most successful societies entrust scientifically trained workers with the most specialized tasks, such as performing brain surgery, designing airplanes, and setting marketwide interest rates. And yet, many individuals regularly entrust their fortunes to the investing equivalents of witch doctors and astrologers. Or they take matters into their own hands for no good reason other than a vague belief that they can do it if they put their minds to it. Unlike good scientists, they're not skeptical enough of themselves or others.

Emerging Global Rolls Out Emerging-Markets High-Dividend ETF
Aug. 19, 2013 - Morningstar, Inc. -  On Thursday, Aug. 15, Emerging Global Advisors launched an equally weighted, passively managed exchange-traded fund that holds 50 emerging-markets stocks that pay high dividends.

EGShares EM Dividend High Income ETF (EMHD) tracks an FTSE index that contains the 50 highest-yielding and liquid, emerging-markets stocks found in a broader FTSE parent index. To ensure diversification, the benchmark caps the number of stocks per country and industry at 10.


class="portal_thumbnail" > Morningstar's Guide to Investing in Chinese Stocks via ETFs
Aug. 16, 2013 - Morningstar, Inc. -  The Chinese economy and equity market continue to demonstrate their importance and impact on the global economy and markets. Our global exchange-traded fund research team has just published "Morningstar's Guide to Investing in Chinese Equities via ETFs" to help investors better understand the nuances of investing in Chinese stocks. The report also gives a comprehensive overview of the global menu of ETFs offering exposure to Chinese equities and highlights key considerations that investors should take into account before making an investment decision.

Volatile Emerging-Markets ETF Flows Mask Growing Allocations to the Developing World
Aug. 14, 2013 - Morningstar, Inc. -  Historical asset flow and Morningstar Investor Returns data show that investors tend to chase performance. Emerging-markets funds would seem to be particularly susceptible to performance-chasing given their pronounced volatility. For example, in 2008, the MSCI Emerging Markets Index plummeted 53% and then rallied 79% in the following year. 

Schwab Readies Launch of Family of 6 Fundamental ETFs
Aug. 12, 2013 - Morningstar, Inc. -  
On Thursday, Aug. 8, Charles Schwab announced its plans to launch a family of six fundamentally indexed exchange-traded funds this week.

Schwab announced it will roll out ETFs tracking the Russell Fundamental Index Series, which is based on research developed by Rob Arnott and Research Affiliates. Schwab currently has five mutual funds tracking this approach, and it plans on creating ETFs tracking those same indexes. The firm also will create a sixth ETF tracking a very broad market index.



Mutual Funds or ETFs?
Jul. 31, 2013 - Morningstar, Inc. -  A lot of people use the terms mutual fund and exchange-traded fund interchangeably. While similar in many respects, these two investment vehicles have key differences. Mutual funds, particular those low costs ones following indexes, tend to be ideally suited for long-term, “evidenced-based”, asset allocation oriented investors. ETFs, on the other hand, are able to be traded intra-day, tend to be cheaper than active mutual funds and have the potential to be more tax-efficient if utilized in an active management context.

Heightened Deal Activity Puts Merger-Arbitrage ETFs in Spotlight
Jul. 31, 2013 - Morningstar, Inc. -  This week began with a flurry of merger-and-acquisition activity. While global M&A activity hit a three-year low in the first half of 2013, U.S. deal activity has been up nicely for the year to date (up 34%) relative to 2012. Some of the biggest deals have been  Berkshire Hathaway's (BRK.A) acquisition of H.J. Heinz,  Anheuser-Busch Inbev (BUD) acquiring Grupo Modelo, the merger of  T-Mobile US (TMUS) and MetroPCS, and  Comcast (CMCSA) acquiring from  General Electric (GE) the balance of NBC Universal that it didn't already own. Plenty of other major deals are pending, including  Dell's (DELL) proposed leveraged buyout,  Office Depot's (ODP) bid to acquire  OfficeMax (OMX) in what's being termed a merger of equals, the merger of  US Airways (LCC) and American Airlines parent AMR, and Linn Energy's (LINE) proposed buyout of Berry Petroleum (BRY).

8 Questions to Ask Before You Follow Your Advisor Into ETFs
Jul. 29, 2013 - Morningstar, Inc. -  I received an email from a friend a few weeks back, in which she noted that her advisor was recommending she ditch her portfolio of mutual funds and switch into exchange-traded funds instead. What did I think about that idea? 

As I drafted my response to her, I realized that plenty of other investors are probably wrestling with a similar question. ETFs and other index products have been raking in the assets during the past few years, and much of that asset growth is coming from advisors shifting out of traditional mutual funds. 


Should You Consider Floating-Rate Bank Loans Today?
Jul. 24, 2013 - Morningstar, Inc. -  Back in October 2012, I wrote an article titled "Are Bank-Loan Funds Ready to Be Loved Again?" in which I discussed the potential benefits of bank-loan funds--particularly in the context of a period of rising interest rates. If you're unfamiliar with the bank-loan sector, take a peek at that article before reading on.

In my previous piece I noted that bank loans have tended to have low average default rates versus high-yield bonds, above-average yields, and very low duration (given that they pay floating rates), are negatively correlated to Treasury bonds, and have historically generated above-average returns in rising interest-rate environments. All of these features are still valid today. 

Fund Face-Off: First Trust Long-Short High-Yield Funds
May. 21, 2013 - Morningstar, Inc. -  With many income-investors petrified of rising interest rates, some are turning to alternative fixed-income strategies. As my colleague Cara Esser previously noted, senior loan funds offer some potential advantages, as the floating-rate coupon payments lower these funds' durations. But with many of the closed-end funds, or CEFs, in this sector trading at hefty premiums, it might be worth exploring other options.

This week, we take a look at two funds designed to accomplish similar goals:  First Trust High Income Long/Short(FSD) (a CEF) and First Trust High Yield Long/Short (HYLS)(an exchange-traded fund). At first glance, the funds appear to be identical, despite being packaged in different wrappers. However, investors interested in the strategy should note that there are some notable differences between the two funds.