This is an interesting article, writes Roger Nusbaum, about Morningstar rating ETFs as undervalued or over valued by analyzing each of the components, deriving an average of valuations and then rendering an assessment of the ETF.
Be careful relying on this too much. Looking at a list of top performing vs worst performing ETFs or over valued vs under valued can potentially miss the point. Does anyone think the ETF that was the top performer last year will be the top performer this year? There might be an argument to be made that picking last year's best ETF is dumber than picking last year's top performing OEF [open ended fund].
Is Morningstar saying that if an investor is building a diversified portfolio with sector ETFs they should not own an energy sector ETF because they are over valued (the article quotes the company as believing energy is over valued and financials are under valued)? The article doesn't say and I doubt that is the implication but who knows what people will do.
[Energy ETFs include XLE, IYE, and IXC; financial ETFs include XLF, IYF, IYG, and IXG.]
Energy may be over valued but often these types of things tend to go to huge extremes. Additionally, despite being over valued is there any doubt that energy as a group will do well on crude's next run at $60?
I tend to rely on other big picture issues to make sector decisions. I find macro issues to be better forward looking indicators.