Investment research firm, Morningstar, Inc., has launched a Morningstar(TM)Rating for exchange-traded funds (ETFs) based in the United States.
The Morningstar Rating is meant to help investors and advisors compare the risk-adjusted returns of ETFs with other ETFs and similar open-end mutual funds. The research firm has started out with 107 ETFs.
“Increasingly, investors are using exchange-traded funds as vehicles to help them implement their investment strategies,” said Dan Culloton, senior mutual fund analyst at Morningstar. “By providing ratings on ETFs, we can help investors do their homework and better evaluate whether an ETF makes sense for their portfolios.”
ETFs are often compared with open-end index funds, and the rating provides an additional measure for comparing these investments.
The Morningstar Rating for ETFs is derived by comparing each ETF to open-end mutual funds in the same Morningstar Category, or peer group. The rating uses the same methodology as the Morningstar Rating(TM) for funds. To be eligible for a rating, the ETF must have three years of returns.
Because investors must pay commissions to purchase and sell ETFs on an exchange, Morningstar models the trading commissions for an ETF by using a nominal front load and deferred load for each rating period.