Index construction matters for ETFs

What our manager-research team looks for under the hood.

Ben Johnson, CFA 26 July, 2016 | 5:00PM

Morningstar's global manager research team has analyzed and rated thousands of funds around the world during the past two-plus decades. In conducting our research, we have identified five "pillars" that underpin successful funds. These same pillars also form the framework we use in performing our analysis. These pillars are:

  1. People: We assess the calibre of the portfolio managers, analysts, traders and others tasked with running a portfolio.
  2. Parent: We scrutinize fund sponsors' alignment with the best interests of their funds' shareholders.
  3. Process: We gauge whether a fund's strategy is prudent, sensible and repeatable.
  4. Performance: We analyze funds' historical performance on an absolute basis, a risk-adjusted basis, relative to peers and across a variety of market conditions.
  5. Price: Fees matter. They are one of the only reliable predictors of future relative performance. As such, they are a vital input into our analysis.

We use this same approach globally, across all kinds of funds (traditional mutual funds, exchange-traded funds, closed-end funds, and so on) and all types of strategies (active, passive, and in-between).

Of course, we place more emphasis on some pillars than others, depending on the type of fund in question. For example, we will weigh the People Pillar more heavily in the case of a concentrated actively managed stock fund than we will for a total-market index fund.

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About Author

Ben Johnson, CFA

Ben Johnson, CFA  Ben Johnson, CFA, is director of global ETF research for Morningstar and editor of Morningstar ETFInvestor, a monthly newsletter.

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