ETF Center

Since their introduction, exchange-traded funds (ETFs) have become a popular investment vehicle and the number of ETFs available has grown rapidly. One way to think of ETFs is as baskets of stocks, like mutual funds, but you can buy and sell them on the exchanges intra-day like stocks. Learn more about ETFs through the ETF Center, powered by Morningstar®. Once confident in your knowledge, as a Siebert client you can review our ETF Research, which includes an ETF Screener and Profiles from Interactive Data Corporation. Quickly review ETF performance data, holdings and other detailed information to help you make an informed investment decision.

Morningstar.com Logo A commonsense approach for making the most of ETFs.By Morningstar

ETFs can be great tools to add to your financial toolbox. They're cheap, flexible, and tax-efficient. But to benefit from what they have to offer, you must use them intelligently. That means resisting "short-termism" and avoiding the temptation to pile into the hottest performing funds.

To truly tap into all that ETFs have to offer, a successful investor must:

Adopt a Contrarian Point of View You should be skeptical of the funds that attract scads of cash and generate a lot of buzz. View a fund's popularity as a warning sign rather than an invitation, and remember that eye-popping returns--while alluring--are simply not sustainable over the long haul. Too many investors pile into the hottest performing fund just as it's about to cool down. On the other hand, many of the smartest and most successful investors look for opportunities in hidden or unloved corners of the market. We've found that it pays to go against the grain. Our studies have shown that the stock-fund categories with the greatest outflows usually trump the most popular categories over the next three years. At Morningstar, we think the best ideas are often lurking where few people are looking. That's why you'll often find us directing investors away from today's most popular market segments to areas that can't seem to get any love.

Be Valuation Conscious Smart investors look for opportunities where there's a mismatch between a stock's price and its true worth. Similarly, there are times when an ETF's price gets out of whack with the fair values of the securities it owns. Morningstar rates several ETFs based on the valuation of their underlying holdings as estimated by Morningstar equity analysts. This can help investors to uncover funds that hold large slugs of stocks that, in Morningstar analysts' views, are trading at attractive prices.

Pay Attention to the Fundamentals At Morningstar, we like fund managers who have a deep understanding of the financial characteristics of the companies in which they invest. Similarly, our stock analysts cull through financial statements to gain a clearer understanding of a firm's health. You can approach ETF investing in the same way by paying attention to the underlying fundamental data on the fund and its holdings. We favor ETFs that hold sizable stakes of financially sturdy firms that generate respectable growth rates and returns on equity. By sticking with quality holdings, it's easier to weather near-term bumps and maintain a long-term view.

Be Cheap The vast majority of ETFs are index funds, and the whole premise of indexing rests on keeping costs low. In that way, they gain an edge over the typical actively managed fund. There's no reason to pay up for an ETF if you can get essentially the same exposure at a lower price. We'll only consider paying up (and only just a little) if an ETF offers something truly unique and compelling. For example, most broadly diversified large-blend ETFs cover the same ground, and therefore, we don't expect their long-term performances to differ dramatically. So we prefer the cheapest of the lot--Vanguard S&P 500 ETF VOO. By the same token, there's no reason to pay 0.60% for PowerShares Dividend Achievers PFM when Vanguard offers an ETF that provides similar exposure for less than half that price. ETFs and mutual funds have risks, charges and expenses, and you should carefully consider such risks, charges and expenses before investing. For a complete discussion of these risks, charges and expenses, and other important information, you should read the prospectus carefully. You can obtain a copy of the prospectus by calling Siebert's Mutual Fund Department at 800-872-0666 or contacting the ETF or mutual fund company directly.

It's also important to be cost-conscious when it comes to brokerage commissions. Because brokerage fees can quickly swamp an ETF's low-expense advantage, it pays to keep trading to a minimum.

Understand an Index's Construction Methodology It's important to grasp how an ETF's benchmark is constructed so that you can predict how it might look and behave in the future. For example, investors in Guggenheim S&P 500 Equal Weight (RSP) should know that its construction methodology causes it to emphasize smaller and cheaper stocks versus large-cap market-cap-weighted ETFs. There's nothing wrong with equal weighting, per se, and it certainly can be a boon to the fund at times. However, it could also weigh on returns when large-growth stocks are in favor. So it's vitally important for ETF investors to understand how the fund's index is constructed and what kind of market exposures result. ETFs and mutual funds have risks, charges and expenses, and you should carefully consider such risks, charges and expenses before investing. For a complete discussion of these risks, charges and expenses, and other important information, you should read the prospectus carefully. You can obtain a copy of the prospectus by calling Siebert's Mutual Fund Department at 800-872-0666 or contacting the ETF or mutual fund company directly.

Maintain a Long-Term Mind-Set Sometimes it seems that the markets are growing more and more short-term in focus. Quarterly earnings reports get way too much media hype. And many fund managers report that much of the trading in the market is short term in nature. We think you can gain an advantage by bucking this trend. In other words, be a contrarian in your time frame as well. Maintain a long-term focus, and buy to hold. When it comes to trading, less is more. That's particularly important for ETF investors, because you typically pay brokerage commissions each time you trade an ETF. Remember that commission costs can quickly eat away your investment profits.

Another key ingredient to long-term thinking is patience. Long-term investors can't afford to get rattled by short-term setbacks. Very few good investment ideas pan out immediately; most need time to ripen. To be successful, you must have the patience and discipline to stick to your guns as long as the fundamentals remain in your favor.


Disclosure: Morningstar, Inc.'s Investment Management division licenses indexes to financial institutions as the tracking indexes for investable products, such as exchange-traded funds, sponsored by the financial institution. The license fee for such use is paid by the sponsoring financial institution based mainly on the total assets of the investable product. Please click here for a list of investable products that track or have tracked a Morningstar index. Neither Morningstar, Inc. nor its investment management division markets, sells, or makes any representations regarding the advisability of investing in any investable product that tracks a Morningstar index.

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