October 3, 2013

Morningstar Picks Best ETF Providers for 2013

At ETF Invest Conference in Chicago, Morningstar recognizes separate category winners for investors and traders

Morningstar on Thursday announced iShares as the winner of its best exchange-traded fund provider award at the research firm’s second annual awards for U.S. ETFs and ETF providers at its annual conference in Chicago.

For the first time, the Morningstar ETF awards in 2013 also recognized ETF category winners for two classes of investing objectives, investor and trader, based on total cost of ownership and performance. For example, the U.S. ETF commodities precious metals category award for investors went to the iShares Gold Trust (IAU) while the trader category award went to SPDR Gold Shares (GLD).

“This year, we recognize that not all ETFs are created equal and not all investors are created equal, so we recognize what serves investors’ needs,” said Ben Johnson, Morningstar’s director of passive funds research, in announcing the winners at the ETF Invest Conference. “We have differentiated between the trader class and investors class. The cost of liquidity trumps holding cost for traders while investors want a better ongoing holding cost and are not so concerned about liquidity.”

Morningstar identified investor and trader class winners across 40 ETF categories, with the category winner receiving the highest ranking in the category versus its peers.

The ETF providers with the most category winners in both the investor and trader classes within each U.S. category group received the Morningstar Best ETF Provider award. In this year’s awards, iShares had 31 category winners, followed by Vanguard with 23.

The Best ETF Providers in four U.S. category groups were iShares for U.S. stock, iShares for international stock, Vanguard for sector stock and iShares for taxable bonds.

Johnson acknowledged that it was becoming increasingly difficult for smaller ETF providers to compete, especially in core categories. “It’s not winner takes all, but winner takes most,” he said, in reference to iShares and Vanguard. “Scale begets scale and success begets success. The Morningstar styleboxes are firmly entrenched, and I don’t see that changing any time soon.”

He added that the most notable move Morningstar saw this year was iShares replacing Vanguard as the best ETF provider in the U.S. stock category group, though the change had nothing to do with performance or cost.

“Vanguard’s benchmark index changes, announced late in 2012, disqualified many of the firm’s U.S. stock ETFs from consideration under our methodology,” Johnson said in a statement. “That said, over the long term, Vanguard’s index changes will result in lower index licensing fees that we expect will translate to lower fees for shareholders and enhanced tracking performance.”

Morningstar also saw two newcomers in its investor class category winners. The Schwab U.S. Broad Market ETF and Schwab U.S. Large-Cap Growth ETF topped the U.S. ETF Large Blend and U.S. ETF Large Growth categories, respectively. The WisdomTree SmallCap Dividend ETF was the investor class category winner for the U.S. ETF Small Value category.

Asked if the rapidly expanding ETF universe will continue to see the sort of phenomenal growth it has experienced over the last decade, Johnson was skeptical.

“The white spaces are getting less and less all the time,” he said. “There are diminishing returns to covering the white spaces. I imagine people outside of Nashville weren’t looking for a Nashville ETF, and I imagine most people in Nashville weren’t looking for it, either.”

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