StockMarketMBA.com Rating System

Introduction

Our rating system is designed for long-term investors. We look at each ETF and try to decide if it is a "good ETF" that a long-term investor should consider buying. We focus on whether the investment strategy makes sense, the fees charged are reasonable, and if there are compelling reasons to buy a particular ETF when there are 2,000+ alternatives.

Our ratings do not help you with market timing. We do not look at whether the ETF's current market price is reasonable, or whether we think the ETF will perform well over the next year or couple of years. We don't make rating decisions based on which sectors are performing well or not performing well. Similarly, when making rating decisions, we don't consider "global" issues like whether the U.S. stock market is outperforming emerging market stock markets. We don't try to tell you whether to "overweight" one ETF versus another due to market trends.

To be clear, we are not telling you to buy an ETF right now because we have rated it highly. Each investor has to make their own portfolio allocation decisions, and decide when to invest more money in an ETF. When you do decide to invest more money in a particular market, we hope our rating system will help you pick a good ETF from the 2,000+ choices.

In summary, you might buy one of our editor's choice ETFs tomorrow and, if the market crashes, you portfolio will still get hammered.

Our Ratings

We rate ETFs using the following system:

Our ratingDescription
Not ratedWe have not rated this fund.
IncompleteWe lack sufficient information to make a decision about this fund.
PassThere is no compelling reason as a long term investor to buy this fund when there are better alternatives.
ConsiderThis is not one of our favorites, but there are some reasons for a long term investor to consider buying this fund.
Editor's choiceThis is one of our favorite investment funds, as there are compelling reasons for a long term investor to buy this fund.

What does our incomplete rating mean? If we have enough reasons to make an informed judgment about an ETF, we will give it a rating. But sometimes there just isn't enough information available to make an informed decision. When does this happen the most? Usually when there is an ETF that is tracking a newly invented index, and we do not have access to any theoretical backtest data for the index. The index's methodology might make sense to us, so we don't just want to give it a rating of "Pass". But without seeing theoretical backtest data for the index, it is difficult to conclude that the index is a good one. So we will give the ETF a rating of "incomplete".

Note that we don't know for sure when there is theoretical backtest data available for an index. Index providers make money from licensing their indexes, so index information is often carefully guarded. Unfortunately, this means that there are lots of times when an index may have theoretical backtest data, but we don't have access to it. The cynical side of us suspects that virtually all indexes do have theoretical backtest data, but the ETF and the index provider don't want to make it readily available, for whatever reasons.

Note that it is not our intent to rate every ETF, as there are hundreds of ETFs that are not suitable for long-term investors, as they are more vehicles for short-term traders and market timers. For example, most commodity ETFs, with the exception of the gold and silver ETFs that own gold and silver, buy and sell commodity futures or track an index based on the theoretical trading of commodity futures. The "roll costs" of owning a commodity ETF that is based on futures is usually so high that there are very few commodity ETFs that are really meant to be held by long-term investors.

ETFs With Ratings

We have just begun the process of rating every ETF, and it is a big job. So please be patient with us. Here is a live summary of where we stand as of now:

Our ratingETF CountPercentage
Not rated1,85579%
Incomplete1215%
Pass1617%
Consider1486%
Editor's choice552%
Total2,340100%

Please review our list of Editor's Choice ETFs. You can also screen for ETFs based on our ratings using our ETF screener. If you create a free account, you can assign your own ratings to ETFs using our database.

Our initial focus was to rate as many non-leveraged U.S. broad market stock ETFs as possible, as these ETFs make up the core of most investor's stock portfolio. Here is a summary of our ratings for non-leveraged U.S. broad market stock ETFs:

Our ratingETF CountPercentage
Not rated12226%
Incomplete8218%
Pass11424%
Consider12126%
Editor's choice286%
Total467100%

We are now primarily focused on rating non-leveraged global stock ETFs. We don't intend to rate, however, ETFs that track individual countries or individual sectors, as most long-term investors don't includes these in their investment portfolio. Here is a summary of our ratings for these ETFs:

Our ratingETF CountPercentage
Not rated25383%
Incomplete186%
Pass103%
Consider103%
Editor's choice145%
Total305100%

Some Caveats

We are not giving you investment advice

We are a website, not a financial advisory firm. We are not giving you investment advice. Our ratings are mostly designed to help you do your own ETF research. No one really has the time to research all 2,000+ ETFs. If your research time is limited, perhaps it will help you to focus your research on the ETFs that we have rated either "consider" or "editors choice". But do your own research.

We are not trying to time the market

As explained above, we are merely attempting to rate whether an ETF is a good one or not over long periods of time. We do not consider whether an ETF is currently on an uptrend, or a downtrend, or is "overpriced" or "underpriced". If the U.S. stock market crashes tomorrow, our highest rated ETFs will perform poorly over the short run. We are not trying to guess which ETFs are going to "outperform" over the next few years.

We are biased against actively managed funds

We must admit that we are biased against actively managed funds. The founder of StockMarketMBA.com believes in index investing. And the odds of an actively managed ETF outperforming an index ETF are probably very low, especially since actively managed ETFs have higher fees. So it will be very difficult for an actively managed ETF to achieve an "editor's choice" rating. The actively managed ETF would have to be pursuing a unique strategy that was not available from an indexed ETF. Or Warren Buffett would have to start an actively managed ETF.

From a practical stand point, there is nothing compelling about a newly launched actively managed ETF. We don't mean to be insulting with that comment. It is just our bias as index investors. We don't want to be in the business of evaluating a portfolio manager's resume or career record -- they are all smarter than we are and have more experience than we do. But the odds are stacked against them. And it is just impossible to really know who the good portfolio managers really are. So what else is there to look at with an actively managed ETF? There is nothing that stands out, that makes us think: "this is the one I should buy".

Theoretical backtest index data

Most smart beta indexes are fairly new, so when we are rating smart beta ETFs, we have no choice but to look at theoretical backtest data for the index prepared after the index was launched. We all know the limitations of such theoretical backtest data. Every investor has to form their own opinion about whether to trust such data.

We admit that many of the smart beta ETFs that we have rated as an "editor's choice" were given that rating primarily on the basis of a good looking index, often using theoretical backtest data. We evaluate each smart beta index to determine if its methodology seems to make sense given academic factor models and other research. But at the end of the day, an investor sometimes just has to make a gut call as to whether to accept theoretical back test data.

If you lean towards not wanting to rely on theoretical backtest data, you can look at our tool that shows ETFs that have outperformed SPY since inception. To get on this list, the ETF must be at least eight years old.


All data is a live query from our database. The wording was last updated: 11/08/2018.

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