Digging into ETF Star Rankings

A secondary view of this would be to compare the percentage of ratable ETFs in a category that have five stars as compared to the percentage of mutual funds. This standardizes the analysis to compare only the different options with a long enough track record. Here are the top five categories where the percentage of ratable ETFs with five stars is the greatest versus mutual funds:

·         US Fund Convertibles
·         US Fund Large Growth
·         US Fund Consumer Defensive
·         US Fund Emerging-Markets Local-Currency Bond
·         US Fund Large Value

While there are a couple more esoteric categories, ETFs have a higher percentage in two very broad categories in Large Growth and Large Value.   Digging a bit into the data, the Large Growth appears to be a function of the ratio of Nasdaq-based ETFs, while on the Value side, the ETF ranks are dominated by Dividend ETFs.

Here is the same look with the categories where percentage of ratable mutual funds is the greatest (again with the same filter on the ETF universe of at least 10 ratable ETFs).

·         US Fund Inflation-Protected Bond
·         US Fund Pacific/Asia ex-Japan Stk
·         US Fund India Equity
·         US Fund Foreign Large Value
·         US Fund Diversified Emerging Mkts

The first theme that sticks out here is the dominance of non-US categories in which mutual funds rank higher.  Similar to the ETF comparison, there are a couple broader categories that funds rate better on in Foreign Large Value and Emerging Markets.  As I mentioned before, this could be a function of both active management outperforming passive management and/or the market environment in which the funds are being rated on (i.e. ETFs rated on a short-term view versus their mutual fund counterparts).

As I mentioned before, star ratings are only one of many inputs that can be utilized to compare ETFs versus mutual funds.  After looking at the two universes, it appears that there are some categories in which ETFs are leading and some in which they are lagging.  However, as the ETF universe continues to evolve and, more importantly for this analysis, mature, the line separating the two universes may continue to blur.  Morningstar has reinforced this by combining the universes, now time may be next catalyst.

Clayton Fresk is a Portfolio Manager at Stadion Money Management, a participant in the ETF Strategist Channel.


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