Equities

Morningstar to help advisers compare ETFs to mutual funds

Lumping ETFs and mutual funds into the same peer groups.

Morningstar Inc. is embracing the model used by more financial advisers by combing exchange-traded funds and open-end mutual funds into the same peer groups when calculating fund ratings.
The financial-data tracking firm also announced Thursday it plans to start providing forward-looking analysts ratings on ETFs, similar to what it does for mutual funds.
Ben Johnson, Morningstar’s director of global ETF research, compared the enhanced ETF coverage to “removing a fence from a field of flowers.”
Stacking ETFs and mutual funds side by side in the same peer groups is designed to enable financial advisers to judge them as a whole, rather than in separate categories. It is even being promoted as a way to potentially help advisers navigate the Department of Labor’s fiduciary rule for retirement accounts.
“The burden of proof on them, how they select funds for clients, will be greater than ever,” Mr. Johnson said. “Advisers can compare the best alternatives in a particular Morningstar category, whether they are ETFs or open-ended funds.”
Morningstar will assign forward-looking analyst ratings to about 300 ETFs later this year and will continue to add analyst ratings over time.
The move follows similar analysis by S&P Global Market Intelligence, which has been offering opinions and analysts’ views on ETFs since 2008, according to Todd Rosenbluth, director of ETF and mutual fund research.
But lumping ETFs and mutual funds into the same peer groups is not something S&P Global is likely to do anytime soon, Mr. Rosenbluth said.
While index-based mutual funds are already combined with actively managed mutual funds in the backward-looking quantitative analysis at both Morningstar and S&P Global, adding ETFs, the vast majority of which are index-based, to mutual fund peer groups is a different story, Mr. Rosenbluth said.
“Choosing an ETF based on how it performed in the past comes with challenges, because an index-tracking product is not going to be able to repeat its success when the style is out of favor,” he said. “We consider an ETF to be structured different than a mutual fund, and the considerations an investor has should be different.”
Mr. Johnson of Morningstar had a different take.
“Investors increasingly see open-end funds and ETFs as interchangeable options when choosing investments,” he said. “By combining them into the same peer group, investors can more easily compare investments regardless of product structure.”