Research > ETFs > ETF / ETP Commentary > 

Introducing Our Newly Enhanced Fair Value Estimate for Equity ETFs

Morningstar's fair value estimate for exchange-traded funds leverages the bottom-up fundamental analysis produced by our global team of equity research analysts, distilling their extensive work into one powerful metric of the estimated intrinsic value of a portfolio of stocks. We’ve recently enhanced this measure, incorporating our Quantitative Equity Ratings--specifically, our quantitative fair value estimates. This has significantly expanded the number of equity ETFs for which we can calculate a fair value estimate, allowing us to more readily assess valuations across a wider spectrum of global stock markets.
Morningstar’s Approach to Rating Stocks
Our equity analysts evaluate stocks for what they truly are: pieces of a business. Instead of prognosticating short-term price movements or momentum, our analysts focus on determining the value of a business, its risks, and whether the stock price accurately reflects both the value and risk. This philosophy of fundamental research is the foundation for our valuation model. We believe that:
  • how much capital a company invests and what it earns on that capital drive shareholder value;
  • free cash flow--not reported earnings--is what counts;
  • as Warren Buffett has said, "Growth is always a component in the calculation of value--sometimes a positive, often a negative." If a company can't earn its cost of capital, growth destroys value instead of creating it;
  • competitive advantages disappear over time;
  • It is dangerous to assume that the future will be better than the past.
These core beliefs guide our stock analysts as they estimate future cash flow, using their in-depth knowledge of each company and its competitive position within its industry. Our analysts forecast revenue growth, profit margins, and capital investment (and all of the numbers that go into them) for each firm they cover.
Their forecasts for each company populate our discounted cash flow model, which calculates the present value of the company's future discretionary cash flow based on its cost of capital, as determined by our analysts.
What's Changed?
Our enhanced fair value estimate for ETFs incorporates Morningstar's Quantitative Fair Value Estimate. Morningstar calculates the Quantitative Fair Value Estimate using a statistical model derived from the fair value estimates our equity analysts assign to companies. Including these figures in our fair value estimate for ETFs has allowed us to expand our coverage significantly. As of Aug. 23, 2019, we calculated fair value estimates for 96% of all U.S.-domiciled equity ETFs. Previously, when we relied exclusively on the fair value estimates produced by Morningstar’s equity analysts, we’d only been able to calculate fair value estimates for about 30% of this universe.
The Math Behind Our Fair Value Estimate for ETFs
Our per-share fair value estimate for ETFs represents the aggregate, asset-weighted fair value estimate of the stocks in an ETF's portfolio that are covered by Morningstar equity analysts or have a Quantitative Fair Value Estimate, divided by the ETF's number of shares outstanding.
How It Can Be Used
Our fair value estimate for ETFs in isolation is interesting but not yet useful. It is most useful when compared against an ETF's current market price. Dividing an ETF's market price by our fair value estimate for its shares gives us a price/fair value ratio.
  • A price/fair value ratio less than 1 indicates that an ETF's portfolio may be undervalued relative to our estimates of the worth of its individual constituents.
  • A ratio greater than 1 indicates that the portfolio may be overvalued.
  • A ratio equal to 1 indicates that the portfolio may be fairly valued.
Of course, no single data point should be used in isolation to gauge the value of either a single security or a portfolio of them--a more holistic assessment is required. That said, this valuation measure, like many others, can serve as a useful sanity check when assessing your existing portfolio and as a decent starting point when prospecting the broader market for new ideas.
What's Cheap and What's Dear Today?
As of the close of trading on Aug. 23, 2019, our current fair value estimate for iShares Core S&P Total Stock Market ETF was $67.23, making for a price/fair value estimate of 0.96. So, at recent prices, U.S. stocks look fairly valued through this lens. Outside the United States, valuations appear slightly more reasonable. The price/fair value estimate ratios for iShares Core MSCI EAFE ETF and iShares Core MSCI Emerging Markets ETF were 0.90 and 0.88, respectively, as of Aug. 23. Looking further afield, there are segments of the global market that look relatively richer and some that might be cheap.
The exhibits below show the 10 most under- and overvalued equity ETFs--as measured by our price/fair value ratio--as of Aug. 23. In a fully valued market, it should come as little surprise that the most compelling opportunities have a lot of hair on them. Using the price/fair value estimate as a guide, current valuations look favorable in the oil & gas equipment and services and exploration and production industries, as well as firms dealing in lithium and batteries made from the metal. Whether the prospective reward is worth the accompanying risks in any of these market segments is anyone's guess. On the other hand, it appears that stocks in the fintech and cloud computing industries are getting a bit overripe, as two of 10 of the most richly priced funds on our list target these corners of the market. A momentum component is a common thread among six of the 10 funds on this list. This should come as little surprise, as these funds deliberately look to sweep in stocks that have been appreciating in price in hopes that they’ll continue to do so over the near term.


Disclosure: Morningstar, Inc. 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.

Performance data shown is past performance and is no guarantee of future results. Current performance may be higher or lower than the performance data quoted. Yield and return will vary, therefore you have a gain or loss when you sell your shares. For standard quarterly performance, go to the fund's Snapshot page by clicking on the ETF/ETP's symbol.

ETFs may trade at a premium or discount to their NAV and are subject to the market fluctuations of their underlying investments.

For iShares ETFs, Fidelity receives compensation from the ETF sponsor and/or its affiliates in connection with an exclusive long-term marketing program that includes promotion of iShares ETFs and inclusion of iShares funds in certain FBS platforms and investment programs. Please note, this security will not be marginable for 30 days from the settlement date, at which time it will automatically become eligible for margin collateral. Additional information about the sources, amounts, and terms of compensation can be found in the ETF's prospectus and related documents. Fidelity may add or waive commissions on ETFs without prior notice. BlackRock and iShares are registered trademarks of BlackRock, Inc. and its affiliates.

FBS receives compensation from the fund's advisor or its affiliates in connection with a marketing program that includes the promotion of this security and other ETFs to customers ("Marketing Program"). The Marketing Program creates incentives for FBS to encourage the purchase of certain ETFs. Additional information about the sources, amounts, and terms of compensation is in the ETF's prospectus and related documents. Please note that this security will not be marginable for 30 days from the settlement date, at which time it will automatically become eligible for margin collateral.

News, commentary (including "Related Symbols") and events are from third-party sources unaffiliated with Fidelity. Fidelity does not endorse or adopt their content. Fidelity makes no guarantees that information supplied is accurate, complete, or timely, and does not provide any warranties regarding results obtained from their use.

Any data, charts and other information provided on this page are intended to help self-directed investors evaluate exchange traded products (ETPs), including, but limited to exchange traded funds (ETFs) and exchange traded notes (ETNs). Criteria and inputs entered, including the choice to make ETP comparisons, are at the sole discretion of the user and are solely for the convenience of the user. Analyst opinions, ratings and reports are provided by third-parties unaffiliated with Fidelity. All information supplied or obtained from this page is for informational purposes only and should not be considered investment advice or guidance, an offer of or a solicitation of an offer to buy or sell a particular security, or a recommendation or endorsement by Fidelity of any security or investment strategy. Fidelity does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating ETPs. Fidelity makes no guarantees that information supplied is accurate, complete, or timely, and does not provide any warranties regarding results obtained from their use. Determine which securities are right for you based on your investment objectives, risk tolerance, financial situation and other individual factors and re-evaluate them on a periodic basis.

Before investing in any exchange traded product, you should consider its investment objective, risks, charges and expenses. Contact Fidelity for a prospectus, offering circular or, if available, a summary prospectus containing this information. Read it carefully.