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The Exchange-Traded Funds Manual, Second Edition by GARY L. GASTINEAU

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CHAPTER 6
Fund Ratings and Rankings—The Evaluation and Selection of ETFs and Mutual Funds108
This chapter considers fund ratings and rankings and a number of other methods used to evaluate and select funds. Along the way, we will examine the mutual fund and ETF economics that have a significant impact on fund performance and the nature of the guidance currently and prospectively available to investors and advisors as they make mutual fund and ETF purchase and sale decisions.

AN INTRODUCTION TO FUND RATINGS

The reason for including mutual funds as well as ETFs in this discussion is that the most widely cited analyses and ratings of ETFs are published by firms that also publish mutual fund information. It is not surprising that their ETF evaluations/ratings are usually based on some of the same criteria as their mutual fund ratings, but there are at least five important—and sometimes strange—differences between typical ETF and mutual fund evaluations.

The Strange State of ETF Evaluations and Ratings

First, anyone who reads very many articles about ETFs can’t miss the fact that ETF comparisons tend to focus much more heavily on fund expense ratios than most mutual fund evaluations do. This is puzzling because index ETF expense ratios vary less from fund to fund than mutual fund expense ratios vary. The emphasis on ETF expense ratios is partly the result of the ready availability of this metric. The expense ratio is one of the first things an investor sees when she examines an ...

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