From the May 2007 issue of Research Magazine • Subscribe!

Rating ETFs

Having trouble making sense of the ever-growing ETF marketplace? Asset management firm XTF has introduced a free rating service intended to help financial advisors to make educated decisions when choosing which ETFs to buy for clients. The service grades ETFs based on 16 criteria across two broad categories: investment metrics and structural integrity.

"The ETF market is growing so quickly that investors are fast becoming overwhelmed by the number of choices available," says CEO Michael Woods. "Our goal is to help create a more educated ETF investor; one who understands what he or she is investing in and can make an intelligent choice for their portfolio and financial needs. This ratings service is an important step towards achieving that goal."

One thing going for XTF is that it isn't an ETF sponsor. This will give the company liberty to rate ETFs without a bias.

In order for an ETF to be included in the service, it has to trade for a minimum of six months and exhibit enough transparency so XTF can research fundamental factors like diversification, risk metrics and yield numbers -- the same criteria that XTF uses in constructing its portfolios.

Here are a few of the criteria XTF is using to rate ETFs:

Tracking error: tracks at least daily performance data to indicate how well (or poorly) an ETF is matching its benchmark index.

Tax efficiency: shows the ETF's success in maximizing tax efficiency, a hallmark of ETF investing.

Expense and Bid-Ask Ratios: provides an in-depth view of the costs associated with that ETF.

Risk-adjusted historical performance: the only backward-looking metric that plays into the rating system, this criterion tracks 6-month, 1-, 3- and 5-year (if applicable) performance.

Yield measures: includes earnings, dividend yields and yield-to-maturity figures.

Short-term vs. long-term price movement: measures the fund's momentum in various asset classes.

Diversification: the greater the diversification, the more stable the ETF is considered to be.

"We will always be an asset manager first, striving to provide investors with the steady performance, low fees and transparency that drove them to ETFs in the first place," Woods says. "At the same time, we believe that the ratings service will play a key role in how advisors and investors alike choose the ETFs to include in their portfolios."

Founded in 2000, XTF is based in New York City. The rating service is available at XTF.com.

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Ron DeLegge is the editor of www.etfguide.com.

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