Morningstar Advisor - October/November 2009 - 67
shareholders’ equity. To think about it another way, we can think of this metric as a proxy for how much profit a company generates on the money shareholders have invested in the firm. As a point of reference, in the trailing 12 months through Aug. 31, the S&P 500 showed an ROA and ROE of about 7% and 18%, respectively. And And P/C Ratio P/E Ratio < In our quest to uncover funds that have shown relatively stable performance we looked at the total risk as measured by the standard deviation, or variation of the fund’s returns over the past three years. We set the cut-off for the maximum amount of risk we were willing to assume by using the S&P 500 benchmark as our proxy. In the three years up to Aug. 31, the S&P 500 had a standard deviation of about 19.5%. Screening for funds with less volatility than the overall market gives us some comfort in the quality of the screen results. The cap-weighted structure of this ETF translates into relatively concentrated exposure to a few noncyclical consumer staples behemoths. About 75% of assets are allocated to consumer goods firms, with the remaining 25% invested in nondiscretionary retailers. Investors could view this satellite ETF as a defensive tilt to their portfolios. The industry stalwarts steering this ship include the usual suspects: Procter & Gamble PG, Coke KO, Philip Morris PM, and Wal-Mart WMT. More than 60% of this ETF’s portfolio is invested in wide-moat firms and about 30% is allocated to narrow-moat firms. iShares S&P Global Health Care IXJ This fund tracks the Dow Jones Global Titans Index, which consists of 50 of the world’s biggest companies based on market cap, assets, book value, revenue, and profits. To be included in the index, each firm must derive at least a portion of its revenue from outside of its home country. Technology and energy companies each soak up about 20% of total assets, with health care, financials, consumer staples, and telecom accounting for roughly 15%, 13.5%, 13%, and 9% of total assets, respectively. Our analysts have assigned wide economic moats to more than half of this ETF’s portfolio (on an asset-weighted basis) and narrow moats to nearly 41% of assets. This fund brims with high-quality stocks. Vanguard Dividend Appreciation ETF VIG And Standard Deviation 3 Yr < So, we’ve covered the bases on quality. The final two criteria we used in the screen were traditional valuation-related metrics, selected to ensure that we don’t overpay for quality. We set the maximum price/cash flow and price/earnings ratios that we were willing to pay at a reasonable 15 times. For perspective, he S&P 500’s trailing 12 month P/C and P/E ratios were about 6 and 15 times, respectively. We’d be more than happy to pay marketlike multiples for highly profitable firms with stable demand and favorable long-term prospects. Under the conservative assumption that earnings and cash flows simply keep up with inflation over the long haul, these metrics translate into a real earnings yield of approximately 7%. This ETF offers investors exposure to a portfolio of some of the finest health-care companies in the world. Similar to the overall healthcare sector’s industry breakdown, big pharma soaks up roughly two thirds of this capweighted fund. Rounding out the portfolio is a sprinkling of managed-care firms, mature biotech companies, and medical device firms. It is worth noting that investors can obtain similar sector exposure (with lower expense ratios) from funds like Vanguard Health Care ETF VHT and Health Care Select Sector SPDR XLV. However, neither of these ETFs contains firms domiciled outside North America. Thus, investors in this ETF would essentially be paying a slight premium (of 0.25% to 0.26%) on the net annual expense ratio here in order to gain exposure to foreign firms like Novartis NVS, Roche RHHBY, and Sanofi-Aventis SNY. Overall, international firms represent approximately 35% of the fund’s assets. Health care is This ETF holds a diversified portfolio of high-quality U.S. large-cap equities that could easily serve as a conservative core U.S. equity position. The custom index used for this fund demands that companies increase their dividends for 10 consecutive years just to make the cut. It then imposes further tests for liquidity and financial strength to narrow the U.S. equity universe down to an exclusive list of nearly 200 names across a variety of sectors and industries. It is hard to find fault with the names that top this ETF’s portfolio: stalwarts such as Procter & Gamble PG, International Business Machines IBM, ExxonMobil XOM, and McDonald’s MCD. In fact, this portfolio has more than 90% of its assets in companies that our analysts assign wide or narrow moats and an incredible 85% of assets in companies with low or medium uncertainty. John Gabriel is an ETF analyst with Morningstar. MorningstarAdvisor.com 67
http://www.MorningstarAdvisor.com
Morningstar Advisor - October/November 2009
Table of Contents for the Digital Edition of Morningstar Advisor - October/November 2009
Morningstar Advisor - October/November 2009
Contents
New on MorningstarAdvisor.com
Letter from the Editor
Contributors
How Do You Use Behavioral Finance in Your Practice?
Investing in the Moment
Investment Briefs
How the Best Large-Cap Managers Rise Above the Rest
Don’t Give Up on Stocks Just Yet
Makeup of the Mind
A Top-Down Approach
In Practice: Patterns of Investor Irrationality
A Call for Nudges
The Furious Comeback of Emerging Markets
Junk-Bond Pioneer
Four Picks for the Present
Consumer Staples Hold Up in the Kitchen
Familiarity Can Breed Bad Investment Decisions
Leave the ‘Junk Rally’ Behind and Look for Quality at a Reasonable Price
Mutual Fund Analyst Picks
50 Most Popular Equity ETFs
Undervalued Stocks
New at Morningstar
Meet the New Boss, Same (School) as the Old Boss
Morningstar Advisor - October/November 2009 - Morningstar Advisor - October/November 2009
Morningstar Advisor - October/November 2009 - Cover2
Morningstar Advisor - October/November 2009 - 1
Morningstar Advisor - October/November 2009 - 2
Morningstar Advisor - October/November 2009 - Contents
Morningstar Advisor - October/November 2009 - 4
Morningstar Advisor - October/November 2009 - 5
Morningstar Advisor - October/November 2009 - New on MorningstarAdvisor.com
Morningstar Advisor - October/November 2009 - 7
Morningstar Advisor - October/November 2009 - 8
Morningstar Advisor - October/November 2009 - Letter from the Editor
Morningstar Advisor - October/November 2009 - Contributors
Morningstar Advisor - October/November 2009 - 11
Morningstar Advisor - October/November 2009 - How Do You Use Behavioral Finance in Your Practice?
Morningstar Advisor - October/November 2009 - 13
Morningstar Advisor - October/November 2009 - 14
Morningstar Advisor - October/November 2009 - Investing in the Moment
Morningstar Advisor - October/November 2009 - 16
Morningstar Advisor - October/November 2009 - 17
Morningstar Advisor - October/November 2009 - 18
Morningstar Advisor - October/November 2009 - Investment Briefs
Morningstar Advisor - October/November 2009 - 20
Morningstar Advisor - October/November 2009 - 21
Morningstar Advisor - October/November 2009 - How the Best Large-Cap Managers Rise Above the Rest
Morningstar Advisor - October/November 2009 - 23
Morningstar Advisor - October/November 2009 - 24
Morningstar Advisor - October/November 2009 - 25
Morningstar Advisor - October/November 2009 - 26
Morningstar Advisor - October/November 2009 - Don’t Give Up on Stocks Just Yet
Morningstar Advisor - October/November 2009 - 28
Morningstar Advisor - October/November 2009 - 29
Morningstar Advisor - October/November 2009 - Makeup of the Mind
Morningstar Advisor - October/November 2009 - 31
Morningstar Advisor - October/November 2009 - A Top-Down Approach
Morningstar Advisor - October/November 2009 - 33
Morningstar Advisor - October/November 2009 - 34
Morningstar Advisor - October/November 2009 - 35
Morningstar Advisor - October/November 2009 - 36
Morningstar Advisor - October/November 2009 - 37
Morningstar Advisor - October/November 2009 - 38
Morningstar Advisor - October/November 2009 - 39
Morningstar Advisor - October/November 2009 - In Practice: Patterns of Investor Irrationality
Morningstar Advisor - October/November 2009 - 41
Morningstar Advisor - October/November 2009 - 42
Morningstar Advisor - October/November 2009 - A Call for Nudges
Morningstar Advisor - October/November 2009 - 44
Morningstar Advisor - October/November 2009 - 45
Morningstar Advisor - October/November 2009 - 46
Morningstar Advisor - October/November 2009 - 47
Morningstar Advisor - October/November 2009 - The Furious Comeback of Emerging Markets
Morningstar Advisor - October/November 2009 - 49
Morningstar Advisor - October/November 2009 - 50
Morningstar Advisor - October/November 2009 - 51
Morningstar Advisor - October/November 2009 - 52
Morningstar Advisor - October/November 2009 - 53
Morningstar Advisor - October/November 2009 - 54
Morningstar Advisor - October/November 2009 - Junk-Bond Pioneer
Morningstar Advisor - October/November 2009 - 56
Morningstar Advisor - October/November 2009 - 57
Morningstar Advisor - October/November 2009 - Four Picks for the Present
Morningstar Advisor - October/November 2009 - 59
Morningstar Advisor - October/November 2009 - 60
Morningstar Advisor - October/November 2009 - Consumer Staples Hold Up in the Kitchen
Morningstar Advisor - October/November 2009 - 62
Morningstar Advisor - October/November 2009 - 63
Morningstar Advisor - October/November 2009 - Familiarity Can Breed Bad Investment Decisions
Morningstar Advisor - October/November 2009 - 65
Morningstar Advisor - October/November 2009 - Leave the ‘Junk Rally’ Behind and Look for Quality at a Reasonable Price
Morningstar Advisor - October/November 2009 - 67
Morningstar Advisor - October/November 2009 - Mutual Fund Analyst Picks
Morningstar Advisor - October/November 2009 - 69
Morningstar Advisor - October/November 2009 - 70
Morningstar Advisor - October/November 2009 - 71
Morningstar Advisor - October/November 2009 - 50 Most Popular Equity ETFs
Morningstar Advisor - October/November 2009 - 73
Morningstar Advisor - October/November 2009 - Undervalued Stocks
Morningstar Advisor - October/November 2009 - 75
Morningstar Advisor - October/November 2009 - 76
Morningstar Advisor - October/November 2009 - 77
Morningstar Advisor - October/November 2009 - 78
Morningstar Advisor - October/November 2009 - New at Morningstar
Morningstar Advisor - October/November 2009 - Meet the New Boss, Same (School) as the Old Boss
Morningstar Advisor - October/November 2009 - Cover3
Morningstar Advisor - October/November 2009 - Cover4
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