With that in mind, it’s no surprise that when rating a passive fund, we focus on the underlying index. Being the biggest driver of a passive fund’s performance, we think the index should take precedence over tracking performance and price.
We tend to rate positively all passive funds that track broadly-diversified and sensibly-constructed indices.
Usually, these indices provide an adequate representation of the opportunity set available to active managers in their category.
Conversely, we view less favourably funds that track narrow and concentrated indices, as these often leave scope for active managers to add value.
At time of writing, of the 153 ETFs we’ve rated in Europe, 95 are awarded a positive rating (i.e. Gold, Silver or Bronze). We expect these funds will outperform their category peers, passive and active, over a full market cycle on a risk-adjusted basis.
The remaining 59 ETFs are rated either Neutral or Negative, reflecting our lack of conviction that they will outperform.
Hortense Bioy is director of European passive funds research at Morningstar
