Your Morningstar Freebee: Looking Beyond the Stars by Steve Abramowitz

Morningstar, that indispensable fund advisory service, has a freebee, but it’s missed by many folks who could benefit mightily from its wisdom and data. True, to monitor your holdings via the invaluable Portfolio Manager, you’ll have to pony up the $249 admission price. But many investors are unaware they can pull up comprehensive analyses—both quantitative and qualitative—of their individual mutual funds and ETFs without a subscription.

Why would Morningstar allow you to squeeze in without paying for its coveted fund reviews? No, they’re not on a self-destructive kick. The offer is a come-on, just like Fidelity hopes to lure prospects with its no-fee (really) index funds. The big boys want to sweep you under their financial services umbrella, confident they can woo you into highly profitable products (Morningstar) or expensive active funds or annuities (Fidelity).

Where am I going with all this? Well, I want to demystify the fund evaluations by walking through an example from Vanguard, where many of you reside. I suspect most readers are lodged in broad market funds, but I’m going to bypass them—where many of you are already well-versed—in other words, they’re too easy. I’ll choose Vanguard’s Small-Cap ETF (VB), a fund I recently purchased after consulting its Morningstar write-up. Just to note, the performance, risk and holdings of VB are virtually identical to those of Vanguard’s Small-Cap Index Fund (VSMAX).

For sure, my way is not the only way and undoubtedly not the best way, but it’s all I’ve got. I can’t bite off the whole enchilada—it’s too big and my knowledge is too limited. Shall we begin the waltz?

I can tell, you’re already mesmerized by the Stars. But hey, what’s this? A Vanguard ETF with only 4 Stars and not 5? Let’s see what this is all about and, remember, the Stars are backward-looking and only moderately predictive going forward. But don’t knock “just” 4 Stars. Keep in mind that VB is an index fund that by definition is designed to track the market, that is, primed for 3 Stars. The fund may have been bumped up to a 4 by virtue of its miniscule expense ratio of .05, which appears on the quote page.

You can get a better take on VB’s success by opening the performance page and sliding over to the 10-year average total return. You can see how it actually outperformed similar funds (category) by a full percentage point. That’s like a cherry on top for any index fund. Don’t worry about 4 Stars, folks, you’re doing good.

But how risky is VB? Maybe its success came at the expense of too much jumping around.  First, we note that the Star Ratings already take into account volatility—they’re risk-adjusted as compared with similar funds. Now, let’s go to Morningstar’s risk pages. No need to get bogged down in the math and the charts—a helpful guide is staring you right in the face. The Portfolio Risk Score tells us the ride is going to be a little bumpy. Early in the accumulation phase, that may not matter to you. But if you’re a jittery type or fast approaching the promised land of retirement, you might want to think twice except, of course, if you’re determined to increase your exposure to small stocks.

So far, it looks like we may be buying into a good thing. But you shouldn’t take the plunge without knowing just what’s in the Vanguard Small-Cap ETF. Let’s take that on next time.