The ratings – which are on a gold, silver, bronze, neutral and negative scale – follows the same methodology Morningstar uses to assign ratings to traditional mutual funds.
While none of the U.S.-listed ETFs received “negative” ratings, 11 received “neutral” ratings.
(Related: 18 Best ETFs in 6 Sectors: Morningstar)
A positive, or medalist, rating means that Morningstar expects the fund to outperform relevant peers, including both mutual funds and ETFs, on a risk-adjusted basis over a full market cycle.
“In the case of a neutral-rated fund, we don’t really have enough evidence in our disposal to steer us in one direction or another,” explained Ben Johnson, Morningstar’s director of global ETF research. “So we don’t expect that fund to outperform its category on a risk-adjusted basis over the long term. We don’t see it as being in any way fundamentally impaired either.”
However, a negative rating would imply that a fund is “in some way fundamentally impaired,” Johnson said.
What qualifies an ETF to have a “neutral” rating?
For the 18 gold-rated ETFs, these funds received a high rating likely because they were tracking broadly diversified indexes as well as charging very low fees. In the case of the neutral-rated ETFs, Morningstar found that they tended to “more often than not to fail on one or both of those criteria,” Johnson said.
“They tend to track indexes that are not broadly diversified,” he told ThinkAdvisor. “They may have some degree of inherent concentration at the level of either individual securities or particular sectors or particular countries. They also more often than not will tend to be relatively richly priced versus competing ETF alternatives.”
By Morningstar’s analysis, the following 11 ETFs received neutral ratings and, thus, will likely not outperform within their respective Morningstar categories.
The following Morningstar categories featured no neutral-rated ETFs: large blend, foreign large blend, large growth, mid-cap blend, intermediate-term bond, small blend, mid-cap growth, short-term bond, world stock, corporate bond, foreign small/mid blend, real estate, and world bond.