Using ETFs for Income 6-12 - Morningstar, Inc.

[Pages:39]Using ETFs for Income

Web Seminar

Scott Burns Director of ETF, Closed-End Funds, and Alternatives Morningstar

Disclosure: Morningstar, Inc., receives fees for licensing its indexes to ETF/ETN providers. These fees are mainly based on fund assets under management. BlackRock Asset Management; First Asset; First Trust; Invesco; Merrill Lynch; Northern Trust; Scottrade; and Van Eck currently license Morningstar Indexes. These ETFs and ETNs are not sponsored, issued, marketed, or sold by Morningstar. Morningstar does not make any representation regarding the advisability of investing in ETFs or ETNs that are based on the Morningstar Indexes.

? 2011 Morningstar, Inc. All rights reserved.

ETF Research Process

? Investment Thesis ? Suitability and Risks ? Evaluate Your ETF Options ? Understand the Fundamentals ? Portfolio Impact ? Nuts and Bolts

Needs Graphic here

The process should be iterative: "Wash, Rinse, Repeat"

Applying the Process: The Case for Large-Cap Dividend Stocks

? Investment Thesis: Given lower interest rates, lower economic growth, and greater economic uncertainty, high-quality large caps that pay a dividend are attractive relative to bonds and relative to lower-quality small caps.

? Suitability: Core or Satellite? Large-cap U.S. stocks are typically the largest part of an investor's equity allocation. Because small caps outperform over the long term, strategic portfolios can be overweight. We would recommend reducing that overweight.

? Risk: If we enter a recession, bonds will outperform stocks. If economic growth accelerates, small-cap stocks may continue to outperform, as they have over the last 10 years.

Relative to Bond Yields, Dividend Yields Look Attractive

Source: Morningstar

Stocks Look Attractively Priced

Dividend Payers Have Outperformed Over Time

? Top dividend payers returned 11.1% vs. 8.4% for non-payers since 1927; ending wealth is 8x larger.

Sources: Ken French website

Large Caps Slightly More Expensive Than Small Caps

? Ratio of Large-Cap Price to Book to Small-Cap Price to Book

Large Caps Trade at a Lower Price to Earnings Ratio

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