Please stay tuned for important disclosure information at the conclusion of this episode.

Welcome to Investing Insights. I'm your host, Margaret Giles.

Exchange traded fund launches have continued to accelerate, but not every shiny new strategy is worth owning.

Good investment strategies can compensate investors

with an appropriate return for the risks they take on. What kinds of ETFs are able to deliver

over the long term and which ones fall short? Dan Satiroff is joining me today to explain the hidden

risks in stock ETFs and what investors should look out for. Dan is a senior manager research

analyst for Morningstar

Research Services and the editor of Morningstar's ATF investor newsletter. All right, Dan, thanks for being

here. Thanks for having me. All right. To get started, can you talk about the idea that

ETFs should really be compensating investors for the risk that they take on? And what is an appropriate level of return?

Sure. Yeah. And we could extend this beyond ETFs. This is really like any investment, right?

The way I think about it is it's really kind of hard to nail down precisely what an appropriate

rate of return is. But if you think of it in like risk adjusted return, like a sharp ratio where

you're looking at a unit of risk or unit of return per unit of risk type thing. Let's say you're starting out with a broad market ETF like Vanguard total stock market, right? If you're going to deviate from that total market ETF, you want to make sure that the risk that you're taking on is going to give you a commensurate level of return so that your risk-adjusted return should either stay the

same or be higher than that Vanguard total stock market ETF. So the next natural question is like,

well, what's a compensated risk, right? So there's a really kind of basic framework I use. The first

level is kind of like the strategic beta type risk. So they're going after investment styles like

value, quality,

low volatility, that sort of stuff, right? And you still need to do some due diligence on those

to make sure they're actually capturing that factor and doing it correctly. The next level

of risk would be like active stock selection from active managers. And again, you've got to do some

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