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Morningstar Publishes Report to Help Investors Analyse, Compare, and Select Index Funds

Morningstar UK Limited, a subsidiary of Morningstar, Inc. (NASDAQ: MORN), a leading provider of independent investment research, today published a detailed research report, "Tracking Down the Right Index Fund: The Morningstar Approach".

Morningstar data shows that assets in index trackers and exchange-traded funds (ETFs) in Europe reached record highs of EUR 760 billion in 2014, representing growth of 140 per cent since 2009. The report is authored by Morningstar’s European Passive Strategies Research team and provides a comprehensive guide to Morningstar’s approach to rating index funds to help investors better analyse, compare, and select index funds. The report focuses on the Morningstar Analyst Rating™, which puts index funds on a level pitch with their active counterparts, and examines the key factors to consider, and challenges to tackle, when comparing index funds. The report also provides comparative analysis of the top FTSE 100 and FTSE All Share index funds. 

“Investors face big challenges in identifying the best index funds for their portfolios”, Hortense Bioy, CFA, Morningstar’s Director of European Passive Strategies Research, said. “On a purely quantitative basis, identifying the best index funds from among the current FTSE 100 and FTSE All Share offerings is difficult, if not impossible. Our report takes a holistic approach to index funds analysis and demonstrates how choosing the right benchmark for an investor’s needs is a more straightforward exercise toward meaningful fund selection. We believe this is the best way to help investors and advisers assess the merits of all types of investment strategies, irrespective of the vehicle used.”

Key highlights of the research report include:

  • While costs are critical to consider, an index fund’s underlying index exposure is actually the most important consideration for investors.
  • Measures including fees and tracking difference can help “narrow the field” of funds tracking similar benchmarks.
  • A comparative quantitative analysis between offerings is hampered by data-related constraints including price valuation points that differ according to country practices and time zone. As such, wins and losses in tracking similar benchmarks, such as the FTSE 100, are typically decided by a few basis points of performance.
  • The decision between different benchmarks, such as the FTSE 100 and the FTSE All-Share, can yield outcomes that are far more meaningful to investors’ long-term performance.