ETFdb Realtime Ratings
In January 2011, ETF Database introduced ETFdb Realtime Ratings, a transparent, rules-based framework for evaluating the efficiency of exchange-traded products. The ETFdb Realtime Ratings are designed to allow advisors and investors to objectively compare exchange-traded products with similar objectives and risk/return features. As such, the ETFdb Realtime Ratings can be used as a tool for comparing the relative merits of potential ETP investments, showing how a set of funds stacks up to its peer group in six different metrics as well as an Overall Rating.
- Realtime Ratings Free Preview
- Realtime Ratings Methodology
- Limitations of Realtime Ratings
- How To Use the ETFdb Realtime Ratings
Access to Realtime Ratings for all 1,300+ U.S.-listed exchange-traded products is part of a subscription to ETFdb Pro, which also includes access to more than 30 all-ETF model portfolios, monthly and weekly newsletters, and enhanced ETF screener capabilities (sign up for a free 7-day trial to ETFdb Pro). Free previews of the ETFdb Realtime Ratings are available for ten of the largest ETPs, including SPY, GLD, VWO, EFA, EEM, IVV, QQQ, TIP, VTI, and LQD.
The Realtime Ratings are also included on a separate tab on all ETFdb Category pages and ETFdb Types pages, allowing for quick comparison of products with similar investment objectives. See examples: Energy ETFs and Japan ETFs.
The ETFdb Realtime Ratings assigned to each exchange-traded product are calculated relative to other products in the same ETFdb Category. Each ETP is assigned a Realtime Rating, ranging from A+ to C, on each of six different metrics: Liquidity, Expenses, Performance, Volatility, Dividends, and Concentration. The ETP with the highest score for each metric (as discussed in detail below) is assigned a grade of A+ for that metric. Ratings for the remaining ETPs in the ETFdb Category are then distributed evenly.
An Overall Realtime Rating for each ETP is also calculated; this metric is computed by taking an average of the ETFdb Realtime Ratings across the six metrics mentioned above. Again, there is one A+ Overall Realtime Rating assigned per ETFdb Category; Realtime Ratings for the remaining ETPs in each ETFdb Category are distributed evenly.
In certain pages on kendrawilkinson.info, Realtime Ratings for ETPs from different ETFdb Categories are presented alongside one another. For example, the list of China ETFs includes ETFs from the China Equities ETFdb Category, as well as funds assigned to the Technology Equities, Utilities Equities, Financials Equities, Energy Equities, and other ETFdb Categories. It is important to notw that the Realtime Ratings presented throughout the site are computed relative to the peers in the ETFdb
For ETPs in certain ETFdb Categories, Realtime Ratings for Concentration and Dividend are excluded when they are deemed to be not meaningful. For example, certain ETPs are generally not expected to pay dividends, while others are designed to hold only a small number of individual securities (generally swaps or other derivatives).
Liquidity simply refers to the frequency with which shares of an ETP change hands. Although the creation/redemption mechanism of ETPs allows for “spontaneous liquidity” that can allow investors to execute at or near NAV, liquidity can still be an important consideration for investors trading smaller blocks of shares. Generally, more liquid ETPs with higher average daily trading volumes will feature tighter bid-ask spreads. ETPs that rarely trade may feature very wide bid-ask spreads. As such, ETPs with high volume are generally more attractive than ETPs with low trading volume, all else being equal.
Note that this does not mean that low volume ETFs should be avoided; historical trading volumes are not fully indicative of the liquidity available in an exchange-traded product. This measure is, however, a good indication of the ability of investors to quickly execute small trades at a price close to NAV.
The Liquidity Realtime Rating is calculated using the historical three month average daily volume (ADV); the ETP with the highest ADV receives the best Realtime Rating (A+).
Expenses are obviously important consideration when evaluating potential investments; all else being equal, lower expenses result in higher bottom line returns. There are two components to the Expenses Realtime Rating: expense ratio and commission free availability. ETPs with the lowest expense ratio in each ETFdb Category are assigned a higher Expenses Realtime Rating than ETPs with higher expense ratios.
The availability of an ETP on the various commission free trading platforms is also considered, with that “bonus” based on the number of other ETPs in the same ETFdb Category eligible for commission free trading. If an ETP is the only one in its ETFdb Category that is eligible for commission free trading, the adjustment to the Expenses Rating will be significant. If several other ETPs are included in commission free trading platforms, a smaller adjustment is made to calculate the final Expenses Realtime Rating.
Though past performance is not indicative of future returns, many investors find it useful to evaluate the recent returns delivered by an exchange-traded product. The 52-week total return (i.e., including dividends) is used to calculate the Performance Realtime Rating. Again, the Performance Realtime Rating for each ETP is calculated relative to other ETPs in the same ETFdb Category, meaning that it is possible for ETPs with negative returns to receive a Realtime Rating of A or A+ and possible for ETPs with strong positive returns to receive poor Realtime Ratings.
ETPs that have been in existence for less than 52 weeks are assigned a Performance Realtime Rating of “n/a.”
In evaluating ETPs, many investors examine the historical volatility. Volatility refers to the magnitude of fluctuations in the price of a security; ETPs that often experience significant swings of value (in both directions) can be said to exhibit high volatility, while those that feature more stable prices can be said to exhibit low volatility (see a detailed definition and calculation of volatility here). The Volatility Realtime Rating is calculated using 200-day historical volatility. ETPs with lower historical volatility are assigned higher Realtime Ratings than those with higher volatility. In other words, the Volatility Realtime Ratings assume that investors value low volatility in potential investments, an assumption that might not always hold true (more on this below).
ETPs that have been in existence for fewer than 200 trading days are assigned a Volatility Realtime Rating of “n/a.”
It should be noted that certain exchange-traded products are designed to specifically target high volatility stocks, including funds such as the Russell 1000 High Volatility ETF (HVOL) and Russell 2000 High Volatility ETF (SHVY). In the case of these ETFs, as well as other exchange-traded products, there is a limitation to the application of the Volatility Realtime Rating. If these ETFs accomplish their stated objectives (i.e., targeting high volatility stocks), they can be expected to receive poor Volatility Realtime Ratings.
Current returns are an important consideration to many investors; the receipt of meaningful distributions can be a very valuable attribute. The Dividend Realtime Rating offers an analysis of how the distribution history for an exchange-traded product compares to its peer group; ETPs with high dividend yields receive high Dividend Realtime Ratings, while those that make small or no distributions are assigned a lower rating. The Dividend Realtime Rating is computed using the Annual Dividend Yield, a backward looking measure that uses historical distributions and share price as inputs.
Again, it should be noted that there are some limitations to applying the Dividend Realtime Rating. Because the annual dividend yield considers only historical distributions, it might not be a reliable indicator of the yields that can be expected going forwards. Moreover, some ETPs are not designed to make significant distributions; these funds will generally receive poor Dividend Realtime Ratings. Finally, the Dividend Realtime Rating provides no indication of the stability or consistency of historical dividends; rather, it considers only the magnitude of recent distributions.
The Concentration Realtime Rating is designed to measure the depth and balance of an ETF relative to its peer group. Depth refers to the number of individual holdings maintained by an ETP; an ETP holding 1,000 individual stocks could be described as having greater depth than an ETP with only 100 individual stocks. Balance refers to the concentration of the underlying portfolio in a small handful of individual securities. To compute the Concentration Rating, the percentage of assets in the top ten holdings is utilized. An ETP that allocates just 10% of its total portfolio to the top ten holdings can be described as maintaining greater balance than an ETP with 50% of assets in the top ten securities.
In computing the Concentration Realtime Rating, depth (as measured by the total number of holdings) and balance (as measured by the percent of assets in the top ten securities) are given equal consideration.
Realtime Ratings are computed daily for each ETFdb Category; the Realtime Ratings assigned to each ETP reflect the characteristics of that product compared to other products in the same peer group ETFdb Category. For each ETFdb Category, there are up to six unique Metrics: Liquidity, Expenses, Performance, Volatility, Dividends, and Concentration. In addition, there is an Overall Realtime Rating computed. For each Metric within each ETFdb Category, there is one A+ Rating assigned. Within each ETFdb Category, there is one A+ Overall Rating assigned. The remainder of the ETPs in each ETFdb Category are allocated equally between the following Ratings: A, A-, B+, B, B-, C+, C.
There are several limitations to the ETFdb Realtime Ratings; understanding these limitations can result in more efficient use of these tools. The ETFdb Realtime Ratings are in no way predictions of future returns to any exchange-traded product; all Realtime Ratings are computed using historical data. Moreover, the ETFdb Realtime Ratings should not be used as the sole tool in determining which ETP to purchase for a client or individual portfolio; these Realtime Ratings are designed to be used as support in the decision making process. Not all ETPs are appropriate for certain investors, regardless of the ETFdb Realtime Rating assigned; certain A+ ETPs may feature risk/return profiles that are not consistent with an individual’s risk tolerance or return objectives.
It should also be noted that the ETFdb Realtime Ratings include six metrics that we deem to be useful in evaluating the efficiency of exchange-traded products and therefore their appeal as investments. However, there are a number of additional metrics that investors may also wish to consider when evaluating potential exchange-traded products that are not included within the ETFdb Realtime Ratings.
Finally, the ETFdb Realtime Ratings make no explicit distinction between various product structures; there is no adjustment made to the grades for ETFs, ETNs, grantor trusts, UITs, or any other structure.
The ETFdb Realtime Ratings are designed to be used as a tool for high level comparisons among potential ETF investments, giving advisors and individual investors a framework for evaluating the strengths and weaknesses of different products within a standardized framework.
The ETFdb Realtime Ratings should not be the only tools utilized when making investment decisions; they are meant to complement other research capabilities
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