What are Morningstar ETF ratings?


Quick Answer

Morningstar ETF ratings use the same methodology for open-ended ETFs as it uses for open-ended mutual funds, and it determines the risk-adjusted returns for three, five and 10 years, according to the official company website. Morningstar began rating exchange-traded funds in March of 2006.

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Full Answer

ETFs track indexes, commodities, bonds or a basket of assets and trades like an individual stock, explains Investopedia. Unlike mutual funds, ETFs do not hold net asset values and usually carry smaller fees than buying mutual fund shares. Since ETFs trade like individual stocks, investors move in and out of positions quickly, trying to capitalize on an ETFs high daily liquidity. Most mutual fund investors buy shares of the funds and hold their positions for longer periods of time.

The Morningstar star rating system uses the weighted average of the returns from the three-, five- or 10-year time periods and compares the average to the returns of open-ended funds in the same peer group, explains Morningstar. The rating system then places a star rating on ETFs from one to five, with one being the poorest rating. The company recalculates the risk-adjusted returns each month to help investors identify funds to add to their portfolios. Since ETFs trade like stocks, investors need real-time data and updated ratings quicker than traditional mutual funds.

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