How Morningstar's ETF research team picks funds for you

There are currently more than 900 different ETFs and ETNs available for U.S. investors. Although we on Morningstar's ETF research team revel in all of the different choices ETFs provide, we realize that finding the best funds for your most basic investing needs can be overwhelming. Even after using Morningstar.com's powerful ETF screening tool to look for something as simple as a mid-cap ETF, you will find more than nine choices from various providers, based on various indexes and with expense ratios ranging from 12 basis points to 38.

As if all of the choices weren't confusing enough, picking the right ETF can be a complicated process that often requires making trade-offs regarding liquidity, expenses, and underlying index construction. There are tax issues to keep in mind for funds linked to commodities, and in terms of sectors, you need to decide whether it is worth paying up for international exposure.

Recognizing the challenges that investors face in making what should be simple investing decisions, Morningstar's ETF research team created the ETF Analyst Picks list. This group of 35 ETFs and ETNs is our preferred list of funds across a variety of size, style, geographic, and sector equity themes. Likewise, we have representatives from the fixed-income and commodity broad asset classes. Our ETF Analyst Picks are available to Morningstar.com Premium Members. If you're not a Premium Member, you can still see our picks, access our 300-plus ETF Analyst Reports, and get research on more than 3,000 individual stocks and mutual funds by taking a free, 14-day trial membership.

To create this list, the Morningstar ETF research team looked at a number of factors such as expenses, index construction, liquidity, and diversification. As I mentioned before, sometimes the cheapest ETF is not the most liquid or the best constructed. Because there is no magic formula for how all of these factors should be prioritized, the final decision on whether to include a fund in the ETF Analyst Picks list is qualitative. As such, we have provided additional insight into why each fund made the cut in the comments section of the picks list page.

For example, our pick for an S&P 500 tracking ETF is not the ubiquitous SPDR but rather the iShares S&P 500 Index . While SPY is great if you need to trade $20 million on a moment's notice, the fund suffers some structural disadvantages that cause it to lag the S&P 500's returns over the long run. IVV on the other hand is a much newer product and has relieved itself from this structural defect. The difference is slight, but when you are investing in passive indexes over the long run, every basis point counts.

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