While experts contend it should never be an either/or decision when deciding on mutual funds and ETFs in an investment lineup, how much of either include in a 401(k) menu or managed portfolio is a legitimate question.
Research behemoth Morningstar announced that it will combine ETFs and open-end funds into the same peer group when calculating its quantitative, backward-looking Morningstar Rating for funds. The change will allow investors to more easily compare investments across fund types.
“Investors increasingly see open-end funds and ETFs as interchangeable options when choosing investments,” Ben Johnson, Morningstar’s director of global ETF research, said in a statement. “By combining them into the same peer group, investors can more easily compare investments regardless of the product structure.”
The Chicago-based staple also said it will assign its Morningstar Analyst Rating to ETFs to help “investors assess an ETF’s future prospects based on the fundamental research our analysts conduct.”
Morningstar will assign Analyst Ratings to approximately 300 ETFs later this year and will continue to add Analyst Ratings for ETFs over time. Morningstar’s manager research analysts already publish qualitative ETF analyst reports for more than 650 ETFs.
“We’ve been providing qualitative research and analyst reports on ETFs for more than eight years,” Johnson added. “Applying our globally consistent Morningstar Analyst Rating methodology to these mainly passive investments is a natural extension of our research process.”
In the United States and Australia, Morningstar plans to calculate the Morningstar Rating, percentage ranks, category averages, and other statistics for funds, regardless of product structure, beginning later this year. Morningstar will also remove the load, or commission/sales charge, adjustment from the Morningstar Rating calculation globally. The updated Morningstar Rating methodology for funds is available here.
“We’ve also found that fewer investors are paying commissions or sales charges, which is why we’re removing the load adjustment from the calculation,” Johnson concluded. “When we established the Morningstar Rating methodology, these charges were much more common and we saw a need to highlight the cost for investors. We’re focused on both fairly evaluating the industry’s past and helping investors effectively navigate the future.”