Morningstar created a family of 16 indexes in 2004, targeting coverage of 97% of the US equity markets., explains fund expert Brian Kelly, editor of MoneyLetter.
The indexes were designed to provide investors with accurate benchmarks for performance measurement, in addition to providing building blocks for portfolio construction.
Morningstar uses multiple “inputs” or characteristics to assess a stock’s style. The indexes also reflect the “overall economic importance of a company—the larger and more liquid the security, the more weight it deserves in the index,” according to Morningstar.
The index structure begins with a broad market index: the Morningstar US Market Index. The first level of index breakdown divides this universe into three composite style indexes (i.e., total market value, core, and growth) and three capitalization indexes (i.e., large-, mid-, and small cap).
There is no stock overlap within the style or capitalization indexes. Beyond that, the process breaks stocks into nine style indexes (large value, core, growth, and mid-cap and small-cap of the three). Again, there is no overlap in stock representation or sampling techniques used in the construction of the nine style indexes.
The index that the iShares Morningstar Large-Cap ETF (JKD) tracks is the Morningstar Large Core Index — comprised of large cap equities that have exhibited “average growth and value characteristics.”
The Morningstar large-cap indexes start with the “largest stocks that comprise 70% of market capitalization of the investable universe.”
The value-oriented index within that targets stocks that have a stronger value orientation and which are thought to be undervalued by the market relative to comparable companies.
The growth-oriented large-cap index selects stocks with the strongest growth orientation, and which are expected to grow earnings above average relative to the market. And finally, the core index (which this fund tracks) has exhibited average growth and value characteristics.
Clearly, the dominance of Apple (AAPL) in the portfolio has a major impact on returns, even though there are 78 total holdings in the fund. Other top ten holdings include The Home Depot (HD), Coca-Cola (KO), and Pepsico (PEP).
iShares Morningstar Large-Cap’s performance has placed it in well within the top third of the Morningstar large blend category in seven calendar years since 2010.
