Exchange traded funds (ETFs) are a relatively new type of investment vehicle that can be traded like stocks on an exchange. ETFs track indexes or commodities and are priced throughout the day, unlike mutual funds which are only priced at the end of the day. There are both inverse and leveraged ETFs that allow investors to profit from market movements in either direction at multiplied rates of 2-3x but also come with higher risk. Investors can search for ETFs using various criteria and analyze analyst reports and valuations to evaluate risk. While riskier than mutual funds, ETFs provide opportunities for diversification and adjusting investments.

1. Morningstar:
Exchange Traded Funds
What you need to know to make the right
choices in ETF’s

2. Morningstar:
Exchange Traded Funds
 Our library subscription allows access
to a large list of exchange traded
funds.
 These are a relatively new investment
vehicle and are different from stocks,
mutual funds and other tradable
instruments.

3. Morningstar:
Exchange Trade
 A exchanged traded fund “is an
investment product representing a
basket of securities that track an index
such as the Standard & Poor's 500
Index. ETFs, which are available to
individual investors only through
brokers and advisers, trade like stocks
on an exchange.” (Bloomburg, 2012)

4. Morningstar:
Exchange Traded Funds
 ETF’s are priced though out the day
unlike mutual funds which are only
priced at the end of the day.
 ETF’s have a portfolio that tracks the
gains or losses of a particular index or
commodity.
 Depending upon the type, the investor
may invest in special indexing funds.

5. Morningstar:
Exchange Traded Funds
 Depending upon the amount of risk
that a investor wishes to accept, there
are inverse funds that allow for making
or loosing 2x to 3x what the overlying
market does.
 This means that we can buy a fund
that will allow us to make or loose
money no matter what the overall
market does.

6. Morningstar:
Exchange Traded Funds
 If we think the market is going up we
buy a fund that will pay us 2 to 3x
what the market goes up. If the
market goes up 1% we get 2 to 3%.
 The downside is if the market goes in
the opposite direction that we invest,
we loose the 2 to 3%.

7. Morningstar:
Exchange Traded Funds
 We can search for the type of ETF
that we want by using the standard
search features
 We can search by: Trading
Volume, Analyst Reports, and
Quickrank
 Other data elements are: Category of
fund, Investing Style, Percent returns
for YTD, 1 Month, 3 Month.
 1Year and 3 Year % of return are also
included

8. Morningstar:
Exchange Traded Funds
 If we look at the analyst reports for a
particular ETF, we can sort the list by:
 Category, Style, YTD % Return, and
the Date of the Analysis's Report
 When we look at the report we will
see:
 A lengthy discussion of the fund, its
investing philosophy along with..

9. Morningstar:
Exchange Traded Funds
 the current price, estimate of fair
value,
 Price to consider buying, value rating,
and selling price.
 Not all of this information will be
available for each ETF.

10. Morningstar:
Exchange Traded Funds
 Other things to keep in mind:
 Screening results will change
depending upon the variables
selected.
 For Example, the total number of
ETF’s available, is 1697. If we search
for a YTD return of 20% or more, we
get a list of 98 funds.
 Notice if we look at the funds that are
shown, the majority of them are..

11. Morningstar:
Exchange Traded Funds
 Considered high risk due to the goal of
returning 2x to 3x the rate of return.
This raises the risk of loss if the
market turns against the investor by
the same multiplier as we discussed
earlier.
 We can begin to judge our risk by
looking at the Morningstar valuation
quickrank.
 We can get a sense of how over-

12. Morningstar:
Exchange Traded Funds
 Many of the fund descriptions give the
Morningstar opinion on how over or
under valued a ETF may be.
 If the ETF is overvalued, then it may
be due to both its risk and the fact that
it is overbought.
 In the same vane, if the ETF is
undervalued the worth of its
underlying securities and the fact it
may be oversold may make it worth a
second look.

13. Morningstar:
Exchange Traded Funds
 There are some other very good
reasons as to why the investor should
look at ETF’s. Morningstar states that
“We think that they are excellent
options for lump-sum investments that
you plan to hold for a long time.”
 ETF’s also allow investors to adjust
their investing philosophy by
diversifying into other market
segments that they have never looked
at before.

14. Morningstar:
Exchange Traded Funds
 Depending on how you invest in the
market, you may need to get into and
out of a particular stock. One good
way, if one had to sell a particular
stock but wanted to still invest in that
particular market segment would be to
invest in a ETF that covers that
market. Naturally, you would have
consulted with your financial advisor to
see if this strategy would work for you
before buying the ETF.

15. Morningstar:
Exchange Traded Funds
 ETF’s come in all sizes and shapes of
markets and risks. There are both tax
benefits and risks.
 You should carefully investigate the
ETF before you invest in it.
 The value of ETF’s shifts much more
quickly than mutual funds. These are
not buy and forget investments.