Research firm aims to barge into the ratings biz for exchange-traded funds; rival doing some revising as well
IndexUniverse.com is coming out with exchange-traded fund ratings, putting the firm head-to-head with Morningstar Inc.
Starting this week, the San Francisco-based provider of ETF research will launch a beta version of its ratings. The dot-com expects to make full ratings available for advisers in the next few months, said Matt Hougan, president of ETF analytics at IndexUniverse.com. “Other systems treat ETFs like stocks or mutual funds, and they are not,” Mr. Hougan said in an interview Sunday night at IndexUniverse.com's Inside ETFs Conference.
With the ETF universe expanding rapidly, Mr. Hougan said advisers are asking for help with picking which portfolios to use. Differences often exist between two ETFs that track the same index, Mr., Hougan said. “In 2009, we saw differences of up to 80% among the eight large financial services ETFs,” he said. “That's not a marginal.”
IndexUniverse.com's ratings will grade each ETF based on three categories: efficiency, tradability and fit. For efficiency, the firm will examine whether ETFs track their respective indices, but it will also look at how taxes may be affecting the portfolios and whether the fund engages in potentially risky activities, such as securities lending. If a fund does engage in securities lending, that may lower the fund's score. If it provides money back to the investors, then the score would go back up.
For tradability, IndexUniverse has teamed up with Knight Capital Group to gauge the median premium or discount the ETF has traded at for the past 12 months, as well as the maximum and minimum premium or discounts. Fit will look at the fund's exposure to a sector versus the index's exposure to the sector.
The firm hasn't decided how it will charge for its ratings, but believes that it will be able to compete with Morningstar, the 800-pound gorilla in the ratings space. “Their fundamental rankings look at the persistence of performance and we think that's a flawed way of approaching ETFs,” said Dave Nadig, director of research at IndexUniverse. “An ETF based on the S&P can lose a star because the market went down and we think that doesn't make sense.”
Morningstar acknowledges that its ratings have needed improvement and today announced new data points to its ETF analytics that will allow investors to see the total cost in dollars of each fund. “Our new data-points address how ETFs are different than mutual funds,” said Scott Burns, an analyst at Morningstar. The new data points will, among other things, examine tracking errors of ETFs on a day-to-day basis, as well as an estimated holding cost of a fund. That metric goes beyond expense ratios by also measuring the indirect expenses and payments of an exchange-traded fund. “We are holding ETFs to a higher standard.” Going forward, Morningstar plans to make its rankings even more interactive so advisers can plug in their ETF holdings and see how they rank for a specific period of time. “We are moving away from a static model to an interactive one,” Mr. Burns said.
