Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of Internet, software, and print-based products and services for individuals, financial advisors, and institutions. Morningstar provides independent, analyst-driven research on over 1,800 mutual funds, 300 ETFs, 80 closed-end funds, and 1,800 equities in the U.S. as well as commentary and education resources for investors. Morningstar provides data on approximately 350,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 4 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. The company has operations in 20 countries and minority ownership positions in companies based in two other countries.
ETF Methodology
Morningstar's ETF Research Reports cover approximately 350 individual funds across all asset types. On an asset basis, the Morningstar ETF Research coverage universe represents over 97% of all assets invested in ETFs. Morningstar analysts review ETFs on an individual basis assessing funds along five major criteria.
- Suitability - the appropriate use for the fund and any risks inherent to the structure or holdings.
- Fundamental View - a qualitative assessment of the key-drivers of an ETFs' future performance and what is currently priced into the fund. For example, a broad-index ETF is high level due to the diversification reflected in relation to a particular underlying index, a sector ETF will discuss some of the largest holdings, a fixed-income ETF will deal with relative yields and credit spreads.
- Portfolio Construction - a plain language description of the funds structure including the index tracked, the weighting scheme, and the rebalancing mechanism.
- Fees - the ETFs expense ratio and how it compares to other offerings
- Alternatives - Other ETFs that an investor might research that may provide lower costs, higher liquidity or differing exposures to match an investor's thesis
Morningstar provides two ratings on ETFs:
- Morningstar Star Rating which assesses the fund's risk-adjusted return performance against its category over a trailing 3-year, 5-year and 10-year period. ETFs returns are mapped against the mutual fund space to give investors a clear guide to how the fund has historically measured up against other long-term investment options. Adjustments are made to make sure that funds are properly graded based on the risk-return performance that they deliver. To not do so would underestimate the amount of risk that many high-returning funds take on. Taking on market risks (size, distress, liquidity) can look like alpha is being delivered when really, the fund was just risky and things worked out in its favor.
- Morningstar also provides an analyst-driven Price to Fair Value rating for ETFs that hold primarily equities such as broad index funds, sector funds, niche-themed funds (i.e., Clean Energy). These ratings are derived from the aggregation of our equity-analysts' ratings for the underlying securities. Our individual equity ratings are driven from a fundamental review process that emphasizes the quality of a firm's "economic moat" or the business' sustainability of cash flows and the discount rate used in determining the fair value estimate. Our discounted cash flow projections and an assessment of the risk to the firm's earnings and balance sheet. For an ETF to be rated in this fashion Morningstar must cover at least 66% of the fund's cap-weighted assets.
For the sake of clarification, it should be noted that ETF Star Ratings are quantitatively derived and ETF Price to Fair Value ratings are an aggregation of work done by Morningstar's Equity Research team. As a result, there are instances where ETFs will have ratings without ETF Analyst Research reports and other instances where Morningstar's ETF analysts will provide coverage of a fund without ratings.
View ETF Analyst Report Structure (PDF) to learn more about methodology and ratings.
Closed End Fund (CEF) Methodology
Morningstar analysts review CEFs on an individual basis, assessing funds using five key pillars.
- People - an assessment of the talent of the fund's manager(s) and analyst(s) to determine if his or her (their) experience and resources match the fund's strategy.
- Process - a discussion of the fund's strategy and if the management team has a competitive advantage, enabling it to execute the process well and consistently over time.
- Performance - evaluation of the fund's performance considers whether the performance pattern is logical given the fund's investment process and if the fund earned its keep with strong risk-adjusted returns over relevant time periods.
- Parent - an assessment of the overall investment firm's priorities and its stewardship, including its focus on the needs of its investors
- Fees - an assessment of whether the fund's fees are reasonable compared to its peers.
Additionally, because CEFs are unique investments, analysis extends to discounts and premiums, distribution rates and policies, the use of leverage, and the fund's board of directors.
Focused on these pillars, analysts assign funds a Qualitative Rating and produce a Morningstar CEF Research Report. Currently, more than 80 individual CEFs, representing over 45% of net assets invested in CEFs, have research reports and a Qualitative Rating by Morningstar.
Also, for more than 500 CEFs, Morningstar provides its Morningstar Rating, which assesses a fund's risk-adjusted return performance against its category over trailing 3-year, 5-year and 10-year periods. This helps to take into consideration the volatility that results when high-returning funds take on excessive risk to deliver their performance.
View CEF Analyst Report Structure (PDF) to learn more about methodology and ratings.
Coverage
Analyst-driven research reports are provided for over 300 ETFs and 80 CEFs traded on US exchanges. Morningstar Ratings are available for over 400 ETFs. Morningstar Ratings are provided for over 500 Closed End Funds.
What's Provided on Fidelity.com?
- Morningstar ETF and CEF Research reports, updated daily by Morningstar, are a comprehensive resource for investors on a fund's structure, holdings, key performance drivers and other factors critical to making appropriate investment decisions. View ETF Reports (PDF) and CEF Reports (PDF) to learn more.
- ETF and CEF Ratings: Morningstar Star Rating is based on a weighted scale of the ETFs' or CEFs' 3-year, 5-year, and 10-year track record, depending on the age of the fund and a risk-adjusted historical view on fund performance versus category peers. Price to Fair Value rating is a fundamental view on equity-ETFs' value relative to their share price. The rating is derived from the aggregation of our equity analysts' fundamental research.
- Predefined search strategies to allow investors a convenient and short hand way of conducting popular searches.
- Morningstar ETF and CEF Specialist articles and Weekly commentary.
