Data company FE Trustnet's new ranking system for passive funds promises to offer the first objective guide for comparing exchange-traded funds (ETFs).
Most rankings systems for active funds assume that the best fund is one that beats its benchmark index by the widest margin and with the most consistency. But passive funds aim to replicate the performance of an underlying benchmark so need to be judged by different criteria.
FE Trustnet's new system (available to view at: www.trustnet.com/passive-funds) awards between one and five crowns to ETFs based on their ability to track an underlying index over a three-year period. It awards funds points for low tracking difference (the annualised relative performance of a fund compared with the underlying index over three years) and low tracking error, the volatility of the difference in those returns over three years. It also awards points for liquidity, assuming funds over £100m are likely to be easier to buy and sell with smaller gaps between the buying and selling price, the phenomenon known as bid-offer spread.