How We Rate ETFs and Mutual Funds
QUESTION: Why should fund investors rely on backward-looking fund ratings?
ANSWER: They should not.
QUESTION: Why has backward-looking fund research dominated for so long?
ANSWER: Most investors are slow to change, and legacy firms invest heavily in marketing and distribution.
QUESTION: How exactly should fund research change?
ANSWER: Fund research should be as rigorous as stock research, which means it should be based on rigorous analysis of the fund’s holdings. A fund is only as good as the stocks it holds.
Our proven-superior Stock Ratings drive our ETF and Mutual Fund Ratings. Our Stock Ratings get their edge from our more disciplined approach and superior fundamental data and financial models – as proven by The Journal of Financial Economics and Ernst & Young.
There are two drivers of future fund performance:
- Stock-picking (Portfolio Management Rating) and
- Fund expenses (Total Annual Costs Rating)
Our Predictive Overall Fund Rating is based on these drivers. Then, we rate all funds based on their ranking:
- Top 10% = Very Attractive Rating
- Next 20% = Attractive Rating
- Next 40% = Neutral Rating
- Next 20% = Unattractive Rating
- Bottom 10% = Very Unattractive Rating
We analyze every fund holding based on New Constructs’ stock ratings, which are regularly featured as among the best by Barron’s. Next, we measure and rank the all-in costs of investing in a fund (Total Annual Costs Rating).
Our mutual fund & ETF screener provides ratings and reports on 7400+ funds updated daily.
Figure 1 details the criteria that drive our predictive rating system for funds. The two drivers of our predictive fund rating system are Portfolio Management and Total Annual Costs. The Portfolio Management Rating is the same as our Stock Rating except that we incorporate Asset Allocation in the Portfolio Management Rating. The Total Annual Costs Rating captures the all-in cost of being in a fund over a 3-yr holding period, the average holding period of all mutual fund investors.
Figure 1 – Predictive Risk/Reward Fund Rating Criteria and Thresholds for US Equity Funds
Source: New Constructs, LLC