CFRA will launch significant enhancements and updates to its industry-leading ETF rating methodology and client offerings in Spring 2020, the independent investment research firm announced today.
The ETF new rating approach blends CFRA’s proprietary forensic and fundamental approaches, including forensic earnings quality scores and STARS (Stock Appreciation Ranking System), which offer a proven approach to equities analysis. Ratings will be updated on a monthly basis using a machine-learning model with the goal of identifying the funds with the highest probability of outperformance of its equity or fixed income asset type.
Todd Rosenbluth, Head of ETF & Mutual Fund Research for CFRA, told ETF Trends the addition of forensic accounting holdings research will support the risk assessment of equity ETFs and help identify stocks inside popular ETFs with significant downside risk.
“By utilizing machine learning techniques will make our ratings approach dynamic as our coverage will adjust to shifting market sentiment rather than relying on one approach in both risk on and risk-off markets,” Rosenbluth said. “The First Bridge ETF data, which includes robust peer group classifications will give our clients the ability to compare factor and thematic ETFs with one another from a risk, reward and cost perspective.”
In addition to making these research methodology and rating enhancements, CFRA has also made a significant change to the rating system itself, moving from a three-tiered weighting system for ETFs to a five-tiered star system.
An ETF rated with 5-STARS means that the total return is expected to outperform a similar group of ETFs over the next nine months, while an ETF rated with 1-STAR indicates that the total return is expected to underperform similar group of ETFs over the next nine months.
“Rating stocks and mutual funds on a scale of one to five stars is something our clients have gotten very used to, so it only made sense to take this opportunity to bring that same five-tiered approach to ETFs,” added Rosenbluth. “Coupled with our proprietary ETF data, this approach allows us to bring more nuance to the recommendations we make and for clients to better distinguish among those funds that appear best positioned for future outperformance.”
Notably, the data used to power CFRA’s ETF rating methodology is built upon proprietary content from CFRA’s acquisition of First Bridge Data in August 2019.
With the integration now complete, clients can access the industry’s most comprehensive database of ETF constituent holdings data, reference and classification data, investment analytics, and daily pricing, flows and statistics. The classification data is particularly valuable for ETFs, moving beyond style boxes to reflect the real-world investment criteria of investors. CFRA clients can also use powerful data visualization tools, which allow for the creation of interactive reports by region, by category, and more.
Rosenbluth said they will continue to include fund-specific characteristics and forward-looking metrics in the assessments of all 1,800 ETFs under their watch, including expense ratios and other costs, and they will also continue to rate ETFs within just a few months of its history.
“But with our new rating methodology in place, we will also now be able to identify those ETFs with consistent records of success in both up and down markets, something we believe will resonate well with investors and advisors as the return of volatility seems likely to be on the horizon,” he said.
Ratings following the new methodology will be featured in CFRA ETF research reports beginning in Spring 2020. For more information about CFRA, visit www.cfraresearch.com.