Morningstar has revealed its first set of analyst ratings for exchange traded funds (ETFs) with the £765m iShares UK Dividend ETF the only one of 108 rated European-domiciled ETFs to be labelled with a negative rating.
Morningstar announced in September it would begin to rate ETFs, reflecting the increasing popularity of the passive products.
In the first round of analysis, 12 funds received a gold star rating, 33 silver, 25 bronze, 37 neutral, and one negative.
Hortense Bioy, director of passive research at the ratings agency, said of the iShares decision: "With an ongoing charge of 0.40 per cent, the ETF is expensive when compared with rival UK dividend-oriented passive offerings."
She added that a strategy of selecting high yielding stocks was "risky" because of the possibility that dividends could be cut.
Head of global ETF research Ben Johnson said that the low-cost aspect of ETFs helped to distinguish the funds from other passive products as well as actively managed competitors.
“Obviously, keeping costs—both explicit [the ETF’s expense ratio] and implicit [the cost of portfolio turnover] - at a minimum is paramount in the context of running an index-tracking fund.
“As such, it should come as no surprise that the top-rated ETFs that we analyse are not only among the lowest-cost options in their Morningstar categories when compared with their actively managed peers, but also versus other passive funds.”
But he added the management of an ETF continues to play a vital role in the ranking.
“We tend to favour parent firms that put investors’ interests ahead of commercial goals and that align fund managers’ incentives accordingly. Of course, the skills and experience of the people managing the ETF are an important factor in our analysis.”
The methodology used for rating the ETFs is the same Morningstar uses for its open-ended mutual funds, intended to to be a "forward-looking, qualitative approach".