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CFRA made significant enhancements and updates to its exchange-traded fund rating system as part of a new approach that the firm said Monday “blends CFRA’s proprietary forensic and fundamental approaches.”

That new approach includes forensic earnings quality scores and a Stock Appreciation Ranking System that it said “offer a proven approach to equities analysis.”

The ratings will be updated each month using a machine-learning model with the “goal of identifying the funds with highest probability of outperformance of its equity or fixed income asset type,” CFRA said.

The new rating system “more closely aligns” the firm’s stock and mutual fund research, it said. Its machine learning techniques, meanwhile, “enable users to identify those ETFs with consistent records of outperformance in both up and down markets,” CFRA said.

The data used to power CFRA’s ETF rating methodology was “built upon proprietary content” from CFRA’s acquisition of First Bridge Data in August 2019, CFRA said. With “integration now complete, clients can access the industry’s most comprehensive database of ETF constituent holdings data, reference and classification data, investment analytics, and daily pricing, flows and statistics,” it said.

Prior to the First Bridge purchase, CFRA in October 2016 acquired and has since fully integrated the Equity and Fund Research business from S&P Global, it noted.

“For the past decade, CFRA has provided a unique, forward-looking, holdings-based approach to researching and rating ETFs and we’re now able to dig even deeper on behalf of our clients,” according to Todd Rosenbluth, head of ETF and mutual fund research for CFRA.

“We will continue to include fund-specific characteristics and forward-looking metrics in the assessments of all 1,800 ETFs under our watch, including expense ratios and other costs, and we will also continue to rate ETFs within just a few months of its history,” he said in a statement.

But he added: “With our new rating methodology in place, we will also now be able identify those ETFs with consistent records of success in both up and down markets, something we believe will resonate well with investors and advisors as the return of volatility seems likely to be on the horizon.”

The new rating methodology “reflects the marriage of our analyst’s subject matter expertise, robust accounting analysis, and our unique and proprietary ETF data,” according to Zach Gast, CFRA president.

“Our ratings of more than 1,800 ETFs will help investors navigate the ETF investment landscape in a system designed specifically for ETFs, considering critical factors across Reward, Risk and Cost subcategories to assess a fund’s position relative to peers,” Gast said in a statement.

In addition to making the research methodology and rating enhancements, CFRA also made a “significant change to the rating system itself, moving from a three-tiered weighting system for ETFs to a five-tiered star system,” it pointed out.

Under the new system, an ETF rated with 5 STARS means that the total return is expected to outperform a similar group of ETFs over the next nine months, while an ETF rated with 1 STAR indicates that the total return is expected to underperform similar group of ETFs over the next nine months, it noted.

Ratings following the new methodology will be featured in CFRA ETF research reports starting this spring, it said.

“Rating stocks and mutual funds on a scale of one to five stars is something our clients have gotten very used to, so it only made sense to take this opportunity to bring that same five-tiered approach to ETFs,” Rosenbluth explained. “Coupled with our proprietary ETF data, this approach allows us to bring more nuance to the recommendations we make and for clients to better distinguish among those funds that appear best positioned for future outperformance,” he said.

The new classification data is especially “valuable for ETFs, moving beyond style boxes to reflect the real-world investment criteria of investors,” according to CFRA. Its clients can also use data visualization tools that it said allow for the creation of interactive reports by region, by category and more.