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Morningstar Votes for Mutual Funds

But start going down the list and the landscape changes. Next is the S&P Depositary Receipts (SPY), the oldest ETF and one of the biggest and widely traded. Although the ETF has outperformed the S&P 500 year to date, "it's harder to make a case for the SPDR," according to Morningstar. "It's not a bad option for buy-and-hold investors who want to sock away a lump sum for several years" but it "wouldn't be our first choice."

As the accompanying table reveals, a slew of ETFs on Morningstar's Web site are rated either flat-out negative or mildly positive at best -- (an exception is Vanguard Large Cap ETF (VV), which likely reflects its dirt cheap fees.) Conversely, comments on the largest mutual funds are all positive, some of it overwhelmingly so. Even several struggling funds seem to get the benefit of the doubt from Morningstar.

Interestingly, three of the ETFs (four including the SPY) have outperformed the S&P 500 year to date and the rest trail the index by very modest levels, with one exception. On the mutual fund side, every fund has underperformed the S&P. and two, for which Morningstar urges patience, are down 7.4% and 9.5%, respectively.

This is just one comparison. But if you look at the largest ETFs and mutual funds in other sectors such as technology, financials, health care or real estate, you'll see a similar trend.

"We've also written about the inherent advantages of ETFs," Culloton responds. "The fact that we're expanding our coverage into ETFs is a reflection that we think they're a viable option and will be a part of investors menu going forward."

Morningstar did launch an ETF newsletter in September and "they've done a decent job of outlining the pros and cons," says Tom Lydon, president of the financial advisory firm Global Trends Investments and founder of ETFTrends.com.

But others say the tone of the company's coverage is more negative than not. For instance, shortly after the newsletter was launched, its editor Sonya Morris penned a story for the Morningstar Web site titled: "Avoid these ETFs," which detailed several categories of ETFs that investors should avoid.

Tale of the Tape
Morningstar gives these mutual funds the benefit of the doubt, but not the ETFs
Mutual Fund
(*YTD vs. S&P 500)
ETF
(*YTD vs. S&P 500)
Vanguard 500 Index fund (VFINX): "This fund isn't finished yet."

(-.12%)
iShares S&P 500 Index ETF (IVV): "isn't a dumb investment, but there may be smarter ones."

(+.06%)
Vanguard Total Stock Market Index (VTSMX) "still an excellent long-term holding;"

(-.39)
iShares S&P 100 Index ETF (OEF): "an acceptable choice" Morningstar says," but it's "not without its risks."

(+2.25)
Vanguard Institutional Index (VINIX) "still has a big edge."

(-.01)
iShares Russell 1000 Index (IWB): "If you have other options, exercise them."

(-.43)
Fidelity Magellan (FMAGX) "investors need to show more patience."

(-7.37)
iShares Russell 3000 Index (IWV): "Using this fund as a core holding wouldn't be a disaster, but there are better options."

(-.53)
Davis NY Venture (NYVTX), "Continues to be one of our favorites."

(-1.36)
Rydex S&P Equal Weight (RSP): "isn't as cheap as it could be, but it remains a good index option nonetheless."

(-.52)
Vanguard PRIMECAP (VPMCX): "remains an excellent core holding for those lucky enough to own it."

(-1.32)
PowerShares Dynamic Market (PWC): "is worth watching, but needs more seasoning."

(-4.14)
Fideilty Growth & Income (FGRIX) "Its new manager is off to a poor start, but we'd hang on."

(-4.77)
Vanguard Large Cap ETF (VV): "All told, we think this ETF is a worthy choice to anchor a portfolio."

(-.35)
Legg Mason Value FI (LMVFX): "remains a very attractive choice. We suggest investors adopt Miller's philosophy and tune out the short-term noise."

(-9.5)
iShares Dow Jones US Total Market (IYY): "won't kill you, but you can find offerings with similar risk and reward profiles and even lower expense ratios."

(-.56)
Fidelity Dividend Growth (FDGFX): the managers "contrarian approach has made for extended dry spells, but he's generated fine returns during his nearly 10-year tenure here. This is still one of our favorite large-cap funds."

(-.75)
Rydex Russell Top 50 (XLG): "There's little reason to invest here."

(+1.81)
Fidelity Spartan 500 Index Investor (FSMKX) "The fund's struggles in 2005 don't dampen its long-term appeal."

(-.06)
streetTRACKS Total Market ETF (TMW) "While it's not our first choice, it still provides broad-market exposure at a reasonable price."

(-.96)
* YTD returns as of close, Nov. 3

Roger Nusbaum, portfolio manager with Your Source Financial and a RealMoney.com contributor. took umbrage with another article posted on Morningstar's Web site in September: "Do ETF Managers Eat Their Own Cooking?"

The article concludes many ETF managers aren't investing in the ETFs they manage and therefore aren't as closely aligned with shareholders. The Wall Street Journal had a similarly themed story on Friday, citing data from the Securities and Exchange Commission.

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