About the Editor
Ben Johnson, CFA, is director of global ETF research for Morningstar. Before assuming his current role in 2012, he was director of ETF research for Europe and Asia. He also previously served as a senior equity analyst, covering the agriculture and chemicals industries. Before joining Morningstar in 2006, he worked as a financial advisor for Morgan Stanley.

Johnson holds a bachelor's degree in economics from the University of Wisconsin. He also holds the Chartered Financial Analyst® designation. In 2015, Fund Directions and Fund Action named Johnson among the 2015 Rising Stars of Mutual Funds.


Investment Strategy
Morningstar ETFInvestor scans the globe for value and improving fundamentals across virtually all asset classes. Editor Ben Johnson draws upon academic and practitioner research — including Morningstar's sizeable bench of stock, bond and fund analysts — to find reliable drivers of outperformance.

Morningstar ETFInvestor features two real-money portfolios.

The ETF Income Portfolio assembles a high-quality collection of income-generating ETFs with the goal of earning 5% in excess of the 30-day T-bill rate over a full business cycle. The portfolio adheres to a benchmark-agnostic strategy in its search for absolute returns.

The ETF Global Asset Allocation Portfolio, on the other hand, is more benchmark sensitive. It seeks undervalued asset classes with improving fundamentals. The strategy seeks to beat the 60/40 MSCI ACWI/Barclays US Aggregate benchmark over a full business cycle, with the least risk possible.

 
 
May 31, 2016
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About Editor Editor's Photo
Ben Johnson, CFA,
Director, Global ETF Research and Editor
Ben Johnson, CFA, is director of global ETF research for Morningstar. Before assuming his current role in 2012, he was director of ETF research for Europe and Asia. He also previously served
Featured Posts
ETFInvestor Weekly Update - May 27, 2016

Index Construction Matters

“Waiter! There’s a gold miner in my minimum volatility ETF!”

The largest single stock holding in the portfolio of iShares EDGE MSCI Minimum Volatility USA ETF USMV is—Newmont Mining NEM—one of the world’s largest gold producers. Wait…what? Over the three-year period ending April 30, Newmont’s stock had an annualized standard deviation of monthly returns of 47.9%. Over the same period, the comparable figure for iShares Core S&P 500 ETF IVV was 11.5% and for USMV it was 9.2%. So how did Newmont make its way into USMV’s portfolio? It all boils down to a matter of index construction.

Alex Bryan has written previously on the nuances of the methodologies driving funds like USMV and its rivals like PowerShares S&P 500 Low Volatility ETF SPLV, so I won’t get too deep into the weeds. You can find Alex’s most recent work on the topic here.

In sum, USMV’s index sets out to build a less volatile (relative to its parent index, the MSCI USA Index) portfolio while SPLV’s bogy selects and over-weights the least volatile stocks from the S&P 500. It is unlikely that Newmont would ever wind up in SPLV’s portfolio as its index selects the 100 least volatile stocks from the S&P 500 and weights them by the inverse of their volatilities. But the miner found a home in USMV’s portfolio given its unique characteristics. USMV’s index uses a number of constraints and a proprietary optimization process to construct its portfolio. NEM likely made the grade in part because it has been very volatile, and also on account of the fact that it has a beta of 0.21 and a trailing three-year correlation coefficient of 0.05 to IVV and -0.01 to USMV itself. Thus, this very volatile stock has somewhat counterintuitively played a part in reducing the overall volatility of USMV’s portfolio.

Why am I sharing this with you? Because index construction matters. Many ETFs have like labels, but the contents of the can may be quite different depending on the particulars of their index’s methodologies. I’ll have more to say on this topic in the cover story of the June issue of ETFInvestor, but for now consider this as some food for thought.

Best,

Ben

 



From Morningstar.com

John Rekenthaler shares his takeaways from a recent conversation with Research Affiliates’ Rob Arnott on the topic of factor timing.

John looks at a forthcoming study that examines index funds’ record in fostering better corporate governance standards amongst the firms that they own in “Index Funds are Good Corporate Governors: Who Knew?

Morningstar’s Ultimate Stock Pickers are loading up on financial stocks.

Elsewhere…

A great post on the “Do Something Syndrome” from the Farnam Street Blog.

‘It is not enough to be busy; so are the ants. The question is: What are we busy about?’ Don’t confuse activity with results. There is no reason to do a good job with something you shouldn’t do in the first place.”

     - Henry David Thoreau

Wired provides a peek into the genesis of Charles Schwab’s homegrown robo-advisor, Schwab Intelligent Portfolios.

Portfolio Holdings
Income Portfolio
ETF
YTD Ret %
Price $
1.5
105.8
CASH$
N/A
1.0
3.1
50.2
3.3
67.0
2.9
18.6
-0.7
27.2
5.2
40.6
-0.3
23.8
Global Asset Allocation Portfolio
ETF
YTD Ret %
Price $
1.5
105.8
CASH$
N/A
1.0
3.1
50.2
2.9
18.6
-0.7
27.2
5.2
40.6
-0.3
36.6
5.1
81.8
-0.3
23.8
Most Popular ETFs
ETF Name
YTD Rtn %
3 Yr Rtn %
Trading Vol.
NASDAQ 100 Trust Shares
-10.76
1.45
125,000,944
SPDRs
-3.64
2.68
87,466,496
Semiconductor HOLDRs
-6.23
-11.66
26,838,700
iShares MSCI Japan Index
-6.59
7.18
17,256,500
iShares Russell 2000 Index
-7.46
6.43
16,210,700
Energy Select Sector SPDR
15.88
15.50
14,900,000
Financial Select Sector SPDR
-8.42
2.61
11,612,800
DIAMONDS Trust, Series 1
-3.75
2.21
7,350,600
Utilities Select Sector SPDR
6.84
6.82
3,848,200
Materials Select Sector SPDR
-4.31
8.50
2,179,300
 
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