Morningstar Advisor - August/September 2011 - (Page 43)
The PowerShares ETF follows a much simpler index, which takes the 100 stocks out of the S&P 500 with the lowest volatility over the past 12 months and weighs them by volatility (stocks with the lowest volatility receive the highest weightings). The fund is reconstituted quarterly and carries a lower expense ratio of 0.25%. High momentum (as measured by a stock’s return over a specific time period) is another strategy that has shown to outperform across almost all markets and asset classes. The strategy is now available in an ETF structure: Russell 1000 High Momentum HMTM and Russell 2000 High Momentum SHMO. These ETFs track indexes that follow the same construction methodology as the Russell Low Volatility indexes, except that they hold stocks with the highest momentum, as measured by a stock’s cumulative return over the past 250 trading days, excluding the past 20 trading days. Again, we recommend watching these ETFs before jumping in to see how they perform versus their indexes. HMTM’s and SHMO’s expense ratios are 0.49% and 0.69%, respectively.
Different Flavors of Value and Growth
ETF Analyst Favorites: These funds are proven long-term portfolio builders.
Fund Name U.S. Equities Comments
Vanguard Total Stock Market VTI iShares S&P 500 Index IVV Vanguard Dividend Appreciation VIG Vanguard Value VTV Vanguard Growth VUG Vanguard Mega Cap 300 MGC Vanguard Mid Cap VO Vanguard Small Cap VB iShares S&P MidCap 400 Index IJH iShares S&P SmallCap 600 Index IJR
The quintessential core domestic-stock holding. A newer structure helps make this the best S&P 500 ETF. The highest-quality domestic-stock portfolio around. A cheap, large value ETF that tracks an MSCI Value index. A cheap, large growth ETF that tracks an MSCI Growth index. Provides a cheap large-cap portfolio; no overlap with VO or VB. Low fees, but it may overlap with other large-cap ETFs. Low fees but extends higher up the market-cap ladder than rivals. Higher fees than Vanguard but purer mid-cap exposure. Higher expense ratio than Vanguard but fewer mid-caps in the mix. A low-cost, foreign diversifier with 25% in emerging markets. A good core foreign fund for those seeking to avoid emerging markets.
Vanguard FTSE All-Wd xUS VEU Vanguard MSCI EAFE VEA
Vanguard FTSE All-Wd xUS SmCp VSS The small-cap sibling to VEU. Vanguard MSCI Emg Mkt VWO WisdomTree Emg Mkt SmCap DGS Cheap exposure to about 20 emerging markets. A value-tilted way to play long-term growth in emerging markets. 50%+ exposure to global metal and mining firms. Major U.S. oil companies take up a lot of room here. Global exposure to the most resilient growth industry. These companies produce goods that consumers are loath to give up. More economically sensitive than its consumer-staples cousin. International industrial giants help provide more diversification. The broadest way to play the competitive financials space. Adds foreign players like Vodafone and France Telecom to the mix. Sturdy industry leaders dominate this portfolio. U.S. stocks account for only about a third of this portfolio. Low-cost option for tracking BarCap Aggregate Index. Protects against inflation, but rising interest rates could still hurt. Established and cheap U.S. investment-grade bond ETF. High-yield bond fund with most diversification and low fees.
Sector Funds Fixed Income
iShares S&P Global Materials MXI Vanguard Energy VDE iShares S&P Global Healthcare IXJ Vanguard Consumer Staples VDC Vanguard Consumer Discretion VCR iShares S&P Global Industrials EXI iShares Global Financials IXG
Russell also launched a family of investment discipline ETFs that seeks to provide exposure to different flavors of value (low P/E, dividend income, contrarian) and growth investing (aggressive growth, consistent growth, and growth at a reasonable price). Each of these ETFs track indexes that apply specific screens to the Russell 1000 Index. While there are other funds that appear to be fairly similar to many of the Russell funds, one stands out among growth-oriented ETFs: Russell Growth at a Reasonable Price GRPC. It layers on a valuation screen over a growth screen, which results in a portfolio that is heavier in industrial firms and lighter in technology firms, relative to other growth funds. The fund’s trailing
iShares S&P Global Telecom IXP Vanguard Information Tech VGT iShares S&P Global Utilities JXI Vanguard Total Bond Mkt BND iShares Barclays TIPS Bond TIP iShares iBoxx $ Invest Grade LQD SPDR BarCap High Yield JNK
WisdomTree Emg Mkt Local Debt ELD Provides emerging-markets bond and currency exposure. SPDR BarCap S/T Intl Treasury BWZ
International sovereign bonds with minimal interest-rate risk. An inflation hedge, but REITs’ leverage is a source of risk. Broad exposure by holding futures contracts of 14 different commodities. Tracks a dynamic index to benefit from price momentum and roll yield. A haven for gold bugs, and cheaper than SPDR Gold.
Vanguard REIT VNQ PowerShares DB Commodity DBC United States Commodity Index USCI iShares COMEX Gold Trust IAU
The selection of these funds has nothing to do with their current valuations. Rather, we base our selections on an ETF’s appeal as a long-term holding. We consider such factors as expenses, index construction, tax efficiency, and diversification. This list appears each month in Morningstar ETFInvestor.
Table of Contents for the Digital Edition of Morningstar Advisor - August/September 2011
Morningstar Advisor - August/September 2011
Letter From the Editor
Simplicity and Design Matter
Do You Use ETFs Strategically or Tactically?
The Institutional Way
How to Analyze an ETF
Eyeing ETFs’ Next Chapter
Four Picks for the Present
Morningstar Investment Conference
Pitfalls of Peer Groups
A REIT Recovery, With a Catch
Turning Fund Distribution on Its Head
Here Come ETF Managed Portfolios
Circle These Picks Amid the Crop of New ETFs
ETF Analyst Favorites
Beware, the Accidental Portfolio Manager
It’s the Destination, Not the Vehicle
New Growth, Rooted in Experience
Better Ways to Look at ETFs
How to Better Manage Your Clients’ Future(s)
More Bargain Than Bubble
Cheap, Local, and On a Roll
Mutual Fund Analyst Picks
50 Most Popular ETFs
Undervalued Stocks With Wide Moats
First-Quarter Assets Hit an All-Time High
You Say You Want a Revolution?
Morningstar Advisor - August/September 2011