How To Hit ETF Home Runs?

May 08, 2006

That’s the Subject Line of an email sent to me this morning by Morningstar, of all people. What's next? Penny stocks?

Morningstar is one of the most respected research outfits on the Street  According to their Web site, Morningstar's "mission is to create great products that help investors reach their financial goals."  And for the most part, they do, with easy-to-digest reports that focus investors on important topics like valuation, costs and after-tax returns.

But how exactly does that mesh with the email they sent me earlier today, which came with the subject line: How To Hit ETF Home Runs.

What's next?  Penny stocks?


The Morningstar email suggests that I fork over $25 for a research report promising "3 Ways To Profit From ETFs." It may be a great report, but as for how to profit from ETFs, I'd settle for the tried-and-true: Using them as low-cost index funds to execute simple asset allocation strategies that put my money to work over the long haul.

Morningstar's made a real effort this year to move into the ETF space. In addition to the "home run" report, they made a big splash with the launch of their "stars" ratings on ETFs in March.  While I applaud Morningstar for trying to help investors sort through the ETF space, they're not quite getting it right. The stars ranking, for instance, use past performance as the key determinant of an ETF's ranking.  That may make sense for actively managed funds, but for index funds - tools in an asset allocation strategy - performance-based rankings obscure the real questions:

  • Are the funds low cost?
  • Are they tax efficient?
  • Do they provide deep exposure to the asset classes they track?

In the end, Morningstar should focus more on the value proposition of different ETFs, and less on their short-term performance.

And please: Leave the home runs to Barry Bonds.


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