Methodology Documents

In this paper, we compare the costs of ETFs and index funds, looking at expense ratios, tracking performance, tax efficiency, and trading costs.

This paper discusses Morningstar's view of the 699 ETF managed strategies it tracks, giving investors and advisors insight into industry performance during Q3 2014.

Rating shopping is the practice of arrangers and issuers of structured debt products hiring credit rating agencies with the highest ratings or the least stringent rating level requirements. This paper examines the problem and argues that "race to the bottom" scenario has not occurred due to the strong regulatory oversight established after the financial crisis.

Deferred income annuities are designed to provide guaranteed income for life, with benefit payments beginning at a later date rather than immediately. This paper discusses the potential benefits and challenges plan sponsors, providers, and participants of defined-contribution plans face in incorporating DIAs.

The Morningstar® Stewardship GradeSM measures the extent that fund companies align their interests with fundholders, offering investors and fund a tool to assess client experience against firm practices. This paper examines the relationship between the Stewardship Grade and returns in Canadian mutual funds.

This paper discusses Morningstar's view of the 699 ETF managed strategies it tracks, giving investors and advisors insight into industry performance during Q22014.

This paper discusses the potential benefits of Expert Guidance, or professional online retirement advice, on the savings and investing decisions of individual participants of defined contribution plans, such as 401(k) plans.

Issuance activity in U.S. private-label residential mortgage-backed securities (RMBS) continues to stagnate, reflecting structural challenges including regulatory uncertanty and macroeconomic factors. This paper categorizes the hurdles facing the nonagency RMBS market according to their estimated impact and likely resolution timeline.

This paper offers evidence that investor risk aversion is time-varying and that changes in risk aversion are primarily related to changes in investor expectations instead of historical market returns.

The target-date industry has shown many signs of a maturing, stabilizing market, though there's still plenty of dynamism to be found. Target date funds continue to upend expectations, but other less-favorable trends also continue.

This paper analyzes the trend of decreasing mutual fund fees against the recent history of growing total industry assets under management.

This study focuses on measuring Tracking Efficiency in Chinese equity ETFs. In order to better evaluate Chinese ETFs, this study focuses on more than tracking methods, as it also touches upon the following factors: trading costs, product and index construction, counterparty risk, and task considerations.

Morningstar has conducted qualitative, analyst-driven research on 529 college-savings plans since 2004, providing data on 84 traditional 529 plans, which are included in this study. Assets in 529 plans continue to climb, and plan sponsors have generally hired capable asset managers to run their plans’ assets, but continues to lag that of traditional open-end mutual funds.

This paper examines the relationship between asset managers' stewardship attributes and investor outcomes, and finds that better stewards of capital generally deliver better overall fund performance.

This paper discusses Morningstar's view of the 699 ETF managed strategies it tracks, giving investors and advisors insight into industry performance at Q42013.

Financial assets such as stocks and bonds ar only one component of an investor's total economic worth. Other assets, such as human capital, real estate, and pensions often represent a significant portion of an investor's total wealth. These assets, however, are frequently ignored by practitioners when building portfolios, despite the fact that they share common risks with financial assets. This paper provides evidence that industry-specific human capital, region-specific housing wealth, and pensions have statistically significant exposures to different asset classes and risk factors.

ETF managed portfolios are investment strategies that typically have more than 50% of portfolio assets invested in ETFs. Primarily available as separate accounts, they represent one of the fastest-growing segments of the managed account universe.

When consumption and funding levels are combined and correct modeled, the true cost of retirement is highly personalized based on each household's unique facts and circumstances, and is likely to be lower than amounts determined using traditional models.

This paper offers historical evidence to support the notion that a higher allocation to equities is optimal for investors with longer time horizons and that the time diversification effect is relatively consistent across countries, persisting for different levels of risk aversion.

Occasionally, a fund will move from one Morningstar category to another because of a significant change in its investment process that abruptly leads to a substantially different portfolio. In such cases, the fund’s star rating is treated differently than with a routine category change: it is reset and calculations begin at the date of the significant restructuring. More about our method of dealing with these restructures is described within this document.

The purpose of this study is to provide a comprehensive comparative analysis of the costs of investing in ETPs and index funds across different asset classes and sub-asset classes.

ETF managed portfolios are investment strategies that typically have more than 50% of portfolio assets invested in ETFs. Primarily available as separate accounts, they represent one of the fastest-growing segments of the managed account universe.

Here, we present a concept that we call “Gamma,” designed to quantify the additional value that can be achieved by an individual investor from making more intelligent financial planning decisions. Gamma will vary for different types of investors and for different strategies; however in this paper we focus on five fundamental financial planning decisions/techniques: a total wealth framework to determine the optimal asset allocation, a dynamic withdrawal strategy, incorporating guaranteed income products (i.e., annuities), tax-efficient decisions, and liability-relative asset allocation optimization.

In this paper, we explore the historical relationship between employee stock ownership in 401(k) plans and subsequent company stock return on both a relative performance and risk-adjusted basis.

A Morningstar analysis of the average industry glidepath shows it will meet most retirees' spending needs, and funds with significantly different asset allocations have delivered similar returns in recent years. Other factors may contribute to these investments' relative success over the long term. A new Morningstar study of data on the firms offering the target date series suggests a tie between better stewardship practices and stronger risk-adjusted performance.

This methodology document addresses the return calculation for fixed-rate and zero-coupon bonds. The methodology does not currently address other types of bonds such as floating-note bonds, mortgage-backed and asset-backed bonds, Treasury Inflation-Protected Securities, and so on.

ETF managed portfolios are investment strategies that typically have more than 50% of portfolio assets invested in ETFs. Primarily available as separate accounts, they represent one of the fastest-growing segments of the managed account universe.

This article addresses the issue of the alleged superiority of risk-factor-based asset allocations over the more traditional asset-class-based asset allocation.

Total portfolio refers to a portfolio with a strategic asset-allocation policy consisting of multiple asset classes implemented with various investment managers. This document outlines several methods of attributing performance, including the classic approaches of Brinson, Hood, and Beebower and Brinson and Fachler, the principles upon which today's performance attribution methodologies are founded. It describes Morningstar's recommended method, the top-down geometric method.

Research that has led to what is known as the "low volatility anomaly" in cross-sectional stocks from a similar universe indicates that volatility is not compensated with a "volatility" premium. We find evidence of a risk premium, but it depends on the definition or measure of risk. "Tail risk" measures the probability of having significant losses and should be what investors care about the most. We investigated several risk measures, including volatility and tail risk, and found that volatility is not compensated but tail risk is compensated with higher expected return in both U.S. and non-U.S. equity funds.

The Global Fund Investor Experience report measures the experiences of mutual fund investors in 24 countries in North America, Europe, Asia, and Africa. Morningstar researchers evaluated countries in four categories—regulation & taxation, disclosure, fees & expenses, and sales & media.

Morningstar has conducted qualitative, analyst-driven research on 529 college-savings plans since 2004 and has transitioned to a new ratings scale. The Morningstar Analyst Rating® for 529 College-Savings Plans is the summary expression of our forward-looking analysis of a 529 college-savings plan.

Recent literature indicates that a liquidity investment style – the process of investing in relatively less liquid stocks within the liquid universe of publicly traded stocks – has led to excess returns relative to size, value, and momentum. We examine whether this style can be uncovered not just at the stock level, but at the mutual fund level.

The Similar Funds tool will generate a list of investments that are similar to a user-specified offering. This methodology is based upon several factors including the category, special criteria, portfolio allocation, and performance of the fund provided.

After-tax returns are measures of fund performance that take into account the taxes a hypothetical investor pays on fund distributions and capital gains. This methodology document addresses Morningstar’s interpretation of the 2001 Securities and Exchange Commission guidelines and changes that arose from the Jobs and Growth Tax Relief Reconciliation Act.

This article reviews the motivation for multiplying by root 12 and explains why it does not apply to returns. It then shows the derivation of the correct method to help the reader understand why it is in fact correct.

This paper proposes a new methodology to model ETF premiums and, for the first time, present empirical data on the time-series evolution of ETF premiums and discounts.

Morningstar Target-Date Fund Series Ratings and Research Reports are designed to help individual investors, financial advisors, plan sponsors, and other interested fiduciaries make informed decisions when evaluating a series of target-date funds. Target-date funds are marketed as a one-decision, comprehensive investment option for investors' retirement savings.

In this paper we introduce a model that takes into account current bond yields and allows them to “drift” 3 toward a higher value during retirement using an autoregressive model based primarily on historical relationships between asset classes. This approach can better replicate the actual bond returns a current or near retiree can expect during retirement both now and in the future.

Social Security (SS) is the largest source of retirement income for most Americans. This paper provides the reader with an overview of the SS retirement system and offers insight into key factors that should be considered when determining when to begin receiving SS retirement benefits.

The rating methodology described herein applies to the new issue of a resecuritization of one or more U.S. nonagency RMBS securities. In a typical Morningstar rated resecuritization, one or more securities are pledged to a trust as eligible collateral. All principal and interest collections from the pledged securities, or underlying securities, are paid to the resecuritization trust and distributed to the resecuritization securities in accordance with the resecuritization waterfall. Losses are generally allocated in reverse sequential order with the most junior tranche allocated losses first.

The Morningstar Rating™is a quantitative assessment of a fund's past performance--both return and risk--as measured from one to five stars. It uses focused comparison groups to better measure fund manager skill. The Morningstar Rating is intended for us as the first step in the fund evaluation process. A high rating is not a sufficient basis for investment decisions.

This paper explores the potential benefit an investor (i.e., consumer) can achieve by postponing deferrals into a 401(k) plan and paying off credit card debt instead. Through an analysis we determine that an investor who first pays off a credit card and then saves for retirement, versus just making the minimum credit card payment, can potentially increase his or her 401(k) balance at retirement.

This paper studies how herd behavior and, in particular, market bubbles might be used to predict crashes.

In this updated and expanded report, we build upon our original examination of synthetic exchange-traded funds (ETFs) in Europe, highlighting recent progress made by providers towards increasing the degree of investor protection within their products and the level of transparency around them.

In this paper, we will discuss proprietary Morningstar ETF data points, which can serve as tools to measure the true cost of ETF ownership. These data points help quantify the investor experience of owning an ETF and allow for better fund selection. Selecting the right ETF involves more than just picking the cheapest fund within a category. At the same time, combining all of these factors to determine the best ETF can be overwhelming. This is why we have begun quantifying the ETF investor experience.

This paper explores important differences in the definitions of the expected replacement ratio and elaborate how, like any type of projection involving multiple variables over an extended duration, replacement rate estimates estimates can vary materially based on different assumptions and provide varying levels of insight. Based on this analysis, we would strongly suggest plan fiduciaries be cautious with respect to these projections before basing any decisions on the values.

The sole aim of this paper is to explain why it’s so important for closed-end funds to improve their transparency and release full portfolio holdings on a more frequent basis than has been the case historically.

The purpose of this study is to first establish a framework to evaluate different withdrawal strategies and second to use that framework, in conjunction with Monte Carlo simulations, to determine the optimal withdrawal strategies for various case studies. To establish the framework, we introduce a new metric, the “Withdrawal Efficiency Rate” (WER), which measures the relative efficiency of various withdrawal strategies.

This document addresses the methodology for The Morningstar Category™ classifications for hedge funds. Morningstar supports 31 hedge-fund categories, which map into the following six broad category groups: directional equity, relative value, directional debt, global/derivatives, event, and multistrategy.