Morningstar Introduces New Data Points to Conduct Total Cost Analysis and Enhanced Risk Evaluation of Exchange-Traded Funds

CHICAGO, Feb. 7, 2011 /PRNewswire/ -- Morningstar, Inc. (Nasdaq: MORN), a leading provider of independent investment research, today introduced four new data points for exchange-traded funds (ETFs) that will provide investors with more robust measures of the total costs and risks associated with investing in individual ETFs. Three of the new data points help to quantify the total cost of an ETF by measuring the contributions of an ETF's portfolio manager to performance and liquidity in the secondary market. The fourth new data point measures portfolio concentration in individual sectors or individual securities.

The new data points are:

• Tracking Error: a measure of how closely an ETF follows its benchmark index on a day-to-day basis. Typically caused by sampling error or incomplete replication of the benchmark portfolio, tracking error can cause an ETF's performance to deviate dramatically from its index over time. Morningstar is the first in the industry to calculate tracking error on a daily basis.
• Estimated Holding Cost: a measure of cost that takes into account both explicit and indirect expenses and payments, like income to the ETF from lending shares to options traders. This measures long-term deviations from the index excluding intraday volatility.
• Market Impact Cost: a measure of an ETF's liquidity, by calculating the basis point change in an ETF's price caused by a $100,000 trade. ETFs with lower liquidity can cost more to buy as large purchases drive up their price.
• Portfolio Concentration: a measure of portfolio concentration in a single or small number of sectors, countries, securities, or credit grades or durations, which can affect investment risk.

"Our enhanced analytics are one of the first in the industry to provide a deeper dive into the indirect costs related to investing in ETFs. Allowing ETF shareholders to better understand the total cost of purchasing and owning an ETF can impact long-term performance just as much—if not more—than disclosed expense ratios," said Scott Burns, director of ETF, CEF, and alternative research for Morningstar. "These cost measures vary in importance depending on how long an investor plans to hold an ETF, and how much an investor plans to invest. Our new data points combine to provide a more complete picture of ETF costs, taking all those factors into account. In addition, our portfolio concentration measure will help investors better understand security- or sector-specific risks."

Morningstar covers about 98 percent of the ETF universe, with analyst research reports on more than 400 ETFs and data on approximately 4,500 ETFs. Morningstar has more than 15 ETF analysts globally.

The new data points are currently available in Morningstar Direct(SM), the company's web-based global research platform for institutional investors and through licensed data feeds. To view the methodology for the new ETF data points, please visit: http://global.morningstar.com/ETFdatapoints.

About Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of Internet, software, and print-based products and services for individuals, financial advisors, and institutions. Morningstar provides data on approximately 370,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 4 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. The company has operations in 26 countries.

©2011 Morningstar, Inc.  All rights reserved.

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SOURCE Morningstar, Inc.