ETFs and Asset Allocation - Morningstar

ETFs and Asset Allocation

Michael Rawson, CFA

ETF Analyst

michael.rawson@

? 2006 Morningstar, Inc. All rights reserved.

Increasing Acceptance of ETFs

¡°Anticipating that the U.S. Federal Reserve will resume large-scale

purchases of U.S. Treasury bonds and confronted with strong

domestic political pressure to spur growth and restrain a rising yen,

the Japanese central bank launched a bond-buying program. It said it

would spend 5 trillion yen ($60 billion) to buy government bonds,

corporate IOUs, real-estate investment trust funds and exchangetraded funds¡ªthe latter two a departure from past.¡±

From The Wall Street Journal 10/6/2010

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? 2006 Morningstar, Inc. All rights reserved.

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Agenda

¡Á

Introduction to ETFs

¡Á Overview of ETF Market

¡Á ETFs vs. Mutual Funds

¡Á Advantages and Disadvantages

¡Á

Asset Allocation

¡Á Strategic

¡Á Tactical

¡Á

Tactical Investing Ideas

¡Á

List of ETF Providers with a wide

selection of funds

3

ETFs: A Growth Story

¡Á

¡Á

Industry evolving beyond domestic equity

Democratization of ¡°difficult-to-access¡± asset classes

Source: Morningstar Direct Fund Flows

? 2006 Morningstar, Inc. All rights reserved.

4

2

iShares leads, but Vanguard is gaining¡­

5

Ten Largest ETFs

Fund

Standard & Poor's Depositary Receipts

SPDR Gold Trust

iShares MSCI Emerging Markets Index Fund

Vanguard Emerging Markets Stock Index

iShares MSCI EAFE Index

iShares S&P 500 Index

PowerShares QQQ Trust

iShares Barclays TIPS Bond

iShares iBoxx $ Invest Grade Corp Bond

Vanguard Total Stock Market Index Fund

Ticker

SPY

GLD

EEM

VWO

EFA

IVV

QQQQ

TIP

LQD

VTI

Total Net Assets

(Billion)

78

55

45

36

35

23

22

20

15

15

6

? 2006 Morningstar, Inc. All rights reserved.

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Funds with the Largest YTD Flows

Fund

Ticker

Vanguard Emerging Markets Stock Index

SPDR Gold Trust

PowerShares QQQ Trust

iShares MSCI Emerging Markets Index Fund

Vanguard Total Bond Market Index Fund

VWO

GLD

QQQQ

EEM

BND

Standard & Poor's Depositary Receipts

PowerShares DB US Dollar Index Bullish

iShares FTSE/Xinhua China 25 Index Fund

Financial Select Sector SPDR

SPDR Dow Jones Industrial Average ETF

Total Net

Assets Billion

36

55

22

45

9

SPY

UUP

FXI

XLF

DIA

78

1

9

5

8

YTD Flows

13.3

6.9

2.6

2.5

2.3

-8.8

-2.5

-1.5

-1.5

-1.3

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What Are Exchange-Traded Funds?

¡Á In

a basic sense, most ETFs are investable indexes

¡Á Low-cost

and tax efficient investment vehicles

¡Á Availability

of myriad asset classes allows for efficient diversification

previously available only to large institutions

¡Á Mutual

Funds that trade like stocks¡­

8

? 2006 Morningstar, Inc. All rights reserved.

4

What Are Exchange-Traded Funds?

¡Á But¡­

¡Á Listed

on an Exchange like a stock or closed-end fund

¡Á Traded

Intraday

¡Á Allow

for stock-like strategies such as shorting and margin

investing.

9

How A Mutual Fund Works

10

? 2006 Morningstar, Inc. All rights reserved.

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