Morningstar® Exchange-Traded Fund Research
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ETF Research Methodology
ETF Research Methodology
Morningstar’s exchange-traded fund analysts focus solely on ETFs—explaining how they work and how they fit within a portfolio. Every analyst applies a consistent methodology while generating in-depth reports distilled to a concise opinion of a fund with a risk-adjusted Morningstar Rating™. Drawing from our equity research, our methodology values equity-based ETFs based on the sum of their parts, considering the weighted fair value estimates of constituent securities. Morningstar ETF research reports help investment professionals determine whether an ETF may be suitable for an investor.
Our ETF analysts help investors and the advisors who serve them determine whether a fund is consistent with their goals. They describe what drives the fund’s performance, key risks, and whether the fund is best suited for strategic or tactical investing.
Fundamental View
Our ETF analysts highlight macroeconomic factors that may influence a fund’s performance, and present our take on where the ETF is headed. For equity-based funds, we combine top-down trend analysis with bottom-up valuation analysis. That analysis includes working closely with our equity research team to examine the securities in the ETF for intrinsic competitive advantages, reflected in their Morningstar® Economic Moat Rating™. For non-equity asset classes our macroeconomic analysis is similar, though we look for relative benchmarks of key data points over the past 5 to 10 years.
ETF Fair Value Estimate
The ETF fair value estimate is the aggregate, asset-weighted fair value of the stocks in an ETF portfolio covered by Morningstar, divided by the ETF's outstanding shares. When calculating the fair value estimate, we assume that all constituent stocks we don’t cover are trading at fair value. We classify equity-based ETFs with a Valuation Rating of Undervalued, Fairly Valued, or Overvalued, based on the combined fair value estimate of the portfolio’s holdings.
ETF Fair Value Uncertainty Rating
We examine risk and future cash flows to develop uncertainty estimates, aggregated into our Uncertainty Rating for ETFs. This rating gives investors a fundamental view of the riskiness of an ETF’s underlying holdings.
Portfolio Construction
Our ETF analysts explain what the index is designed to track, how often it rebalances, and other pertinent data. We take a flexible approach to this analysis, accounting for a variety of portfolio construction methods.
We present an ETF’s expense ratio along with the analyst's assessment of how it measures up relative to other options.
Our ETF analysts encourage investors to look at other fund options that may provide better liquidity, market exposure, or more competitive fees. Sometimes we suggest a mutual fund or individual stock alternative that may be more appropriate for an investor’s goals.
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