Morningstar’s Favorite ETFs

I had the pleasure this week of attending the fantastic Morningstar Investment Conference in Chicago. One of the most interesting panels I sat in on was “Our Favorite ETFs,” led by Scott Burns, one of Morningstar’s ETF experts.

Which fund did the team like best? The answer my surprise you: Vanguard Dividend Appreciation (VIG). In fact, Scott said he felt that it was one of the best funds of the century, because of its structure.

The fund tracks the performance of the Dividend Achievers Select Index, which measures the investment return of stocks of companies that have a record of increasing dividends over time.

It holds a wide range of high-quality U.S. large-cap equities such as Wal-Mart (WMT), IBM (IBM), Coca-Cola (KO) and PepsiCo (PEP). Index components have to increase their dividends for 10 consecutive years to be included, but that isn’t all, according to Bradley Kay at Morningstar. There are more tests after that to ensure liquidity and check for financial strength. In the end, about 200 names across a range of sectors are included.

While the fund lost 35% in the year to Feb. 28, it outperformed the S&P 500 (^GSPC), which lost 42% in the same time frame. In the last six months, VIG is up 17.6%. Year-to-date, it’s down 2.8%, it has a 2.9% yield and a 0.27% expense ratio.

Another fund Burns and his crew liked was iShares Barclays TIPS Bond (TIP), saying that it can be a great way to protect the fixed-income portion of your portfolio. The fund has been getting a lot of attention as inflation concerns gather strength.

TIPS help you maintain your purchasing power as the value of the dollar falls. They offer a fixed yield, plus the inflation rate, to keep pace with changes in the consumer price index. TIPS may be attractive, and many financial advisers recommend a permanent 15% portfolio allocation to the class, but buying these bonds at periodic Treasury auctions or in the secondary market can be a pain. An ETF made up of TIPS is easier and more cost efficient.

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