Morningstar:Exchange Traded Funds

What you need to know to make the right choices in ETF’s

Morningstar:Exchange Traded Funds

Our library subscription allows access to a large list of exchange traded funds.

These are a relatively new investment vehicle and are different from stocks, mutual funds and other tradable instruments.

Morningstar:Exchange Trade

A exchanged traded fund “is an investment product representing a basket of securities that track an index such as the Standard & Poor's 500 Index. ETFs, which are available to individual investors only through brokers and advisers, trade like stocks on an exchange.” (Bloomburg, 2012)

Morningstar:Exchange Traded FundsETF’s are priced though out the

day unlike mutual funds which are only priced at the end of the day.

ETF’s have a portfolio that tracks the gains or losses of a particular index or commodity.

Depending upon the type, the investor may invest in special indexing funds.

Morningstar:Exchange Traded FundsDepending upon the amount of

risk that a investor wishes to accept, there are inverse funds that allow for making or loosing 2x to 3x what the overlying market does.

This means that we can buy a fund that will allow us to make or loose money no matter what the overall market does.

Morningstar:Exchange Traded FundsIf we think the market is going up

we buy a fund that will pay us 2 to 3x what the market goes up. If the market goes up 1% we get 2 to 3%.

The downside is if the market goes in the opposite direction that we invest, we loose the 2 to 3%.

Morningstar:Exchange Traded FundsWe can search for the type of ETF

that we want by using the standard search features

We can search by: Trading Volume, Analyst Reports, and Quickrank

Other data elements are: Category of fund, Investing Style, Percent returns for YTD, 1 Month, 3 Month.

1Year and 3 Year % of return are also included

Morningstar:Exchange Traded Funds

If we look at the analyst reports for a particular ETF, we can sort the list by:

Category, Style, YTD % Return, and the Date of the Analysis's Report

When we look at the report we will see:

A lengthy discussion of the fund, its investing philosophy along with..

Morningstar:Exchange Traded Funds

the current price, estimate of fair value,

Price to consider buying, value rating, and selling price.

Not all of this information will be available for each ETF.

Morningstar:Exchange Traded FundsOther things to keep in mind:Screening results will change

depending upon the variables selected.

For Example, the total number of ETF’s available, is 1697. If we search for a YTD return of 20% or more, we get a list of 98 funds.

Notice if we look at the funds that are shown, the majority of them are..

Morningstar:Exchange Traded FundsConsidered high risk due to the

goal of returning 2x to 3x the rate of return. This raises the risk of loss if the market turns against the investor by the same multiplier as we discussed earlier.

We can begin to judge our risk by looking at the Morningstar valuation quickrank.

We can get a sense of how over-valued or under-valued an ETF may be.

Morningstar:Exchange Traded FundsMany of the fund descriptions give the

Morningstar opinion on how over or under valued a ETF may be.

If the ETF is overvalued, then it may be due to both its risk and the fact that it is overbought.

In the same vane, if the ETF is undervalued the worth of its underlying securities and the fact it may be oversold may make it worth a second look.

Morningstar:Exchange Traded FundsThere are some other very good

reasons as to why the investor should look at ETF’s. Morningstar states that “We think that they are excellent options for lump-sum investments that you plan to hold for a long time.”

ETF’s also allow investors to adjust their investing philosophy by diversifying into other market segments that they have never looked at before.

Morningstar:Exchange Traded FundsDepending on how you invest in the

market, you may need to get into and out of a particular stock. One good way, if one had to sell a particular stock but wanted to still invest in that particular market segment would be to invest in a ETF that covers that market. Naturally, you would have consulted with your financial advisor to see if this strategy would work for you before buying the ETF.

Morningstar:Exchange Traded FundsETF’s come in all sizes and

shapes of markets and risks. There are both tax benefits and risks.

You should carefully investigate the ETF before you invest in it.

The value of ETF’s shifts much more quickly than mutual funds. These are not buy and forget investments.