Our new ETF Analyst Reports mark a novel approach to evaluating ETFs.
By Jeffrey Ptak, CFA | 02-27-08 | 06:00 AM | Email Article

We've made some exciting enhancements to our ETF research. Today we're pleased to share our new-and-improved  ETF Analyst Reports with Morningstar.com Premium Members.

Jeffrey Ptak, CFA, is head of global manager research for Morningstar.

A Novel Approach
Our new Analyst Reports mark a novel approach to evaluating ETFs. We're harnessing the research that our 100-plus equity analysts conduct in order to estimate the fair value of stock ETFs.

By comparing our fair value estimate for an ETF's portfolio with the fund's market price, we can better gauge whether an ETF is cheap, dear, or reasonably priced. In so doing, we can help you profit from inviting opportunities as they arise.

Our ETF fair value estimates are based on our stock analysts' rigorous, bottom-up research. Our analysts are digging into company filings, questioning management, conferring with suppliers and competitors, and creating sophisticated financial models--all to estimate each firm's worth and risk. And they are conducting that research in accordance with a disciplined, consistently applied investment philosophy.

We think this is a vastly superior approach to the breathless macro-economic calls, technical analysis, or short-cut methods that often pass for fundamental analysis.

For a more-detailed overview of our approach to evaluating ETFs, see our recent piece "A Better Mousetrap for Evaluating ETFs." And for a synopsis of the new ETF Analyst Reports, we've published a companion piece to this one, entitled "Our New ETF Reports: A Walk-Through."

Re-Tooled Analyst Reports
We've expanded the scope of our analysis to better address an equity ETF's attractiveness based on the valuation of the stocks it owns. This helps us identify stock ETFs that look undervalued, and helps you profit from such opportunities as they arise.

To that end, the new ETF Analyst Reports focus to a far greater extent on traits such as the quality and risk of the stocks an equity ETF owns. By examining these traits, we can glean insights into the factors that most directly influence a fund's intrinsic worth and the risks it courts. Those efforts culminate in a forward-looking "valuation rating"--described immediately below--that sets forth whether an ETF is cheap, dear, or fairly valued based on our estimates.

Innovative Data Points
The new reports also introduce a new "valuation rating" and various other innovative data points that should enhance your ETF research. For instance, the valuation rating, which takes the form of "undervalued," "overvalued," or "fairly valued," clearly offers our bottom-line take on an ETF's valuation in view of the risk it courts. The valuation rating allows you to quickly zero in on ETFs that we think offer the best risk/reward trade-offs.

Meanwhile, other new data points, like "ETF Expected Return," add context and granularity to our research by helping you to quantify an ETF's potential upside and any excess return it's likely to deliver. What's more, we've also compiled data on the quality and risk of each ETF's underlying holdings. Our ETF stock quality and stock risk data points give you a quick read on what's driving our fair value estimate or dictating the margin of safety (i.e., the discount to fair value) we'd demand before investing.

Comprehensive Coverage
Because our analysts follow more than 2,000 stocks, we have the ability to cover a great many ETFs in this fashion. As of this writing, we'd placed fair value estimates on over 300 stock ETFs spanning virtually all of the major domestic and foreign equity categories.

Premium subscribers can find a listing of those ETFs--and a wealth of other data--in our  ETF Valuation Quickrank tool.

Expanded Coverage of Sector, Country, Commodity, and Bond ETFs
We've also rejiggered our coverage universe to cover a greater number of sector, country-specific, commodity, and bond ETFs. We've nearly doubled the number of industry-, country-, and region-specific funds we cover and bumped up the number of bond and commodity ETFs.

We think this revamped coverage list should better serve investors who have made these types of ETFs a central part of their investing strategies.

Securities mentioned in this article

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With Morningstar Analyst reports you can get our expert Buy/Sell opinions on over 3,900 Stock and Funds
Jeffrey Ptak, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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