New FE Passive Fund Rating service to be available to FE’s 30,000 adviser users as part of the ratings and research provider’s goal of creating more transparency in the passive funds industry

FE Trustnet is set to launch the most extensive rating system of index trackers funds in the retail industry, ranking exchange traded funds and passive funds alongside each other for the first time.

Going live on April 22 the FE Passive Fund Rating scores around 250 ETF and passive funds to provide its 10,000 adviser users on FE Analytics and 20,000 adviser users on FE Trustnet a clearer idea of the passive funds they are investing in.

Unlike other more limited qualitative passive rating services, the FE Passive Fund Ratings are unique in that funds are ranked objectively and transparently using a quantitative methodology. This ensures that advisers can give impartial and independent advice which until now has only been available on actively managed funds.

Moving the debate away from just costs, passive funds are awarded between one and five Passive Crowns, based on their ability to track their respective indices. This is judged on three criteria; tracking difference, tracking error and fund size. 

  At launch around 250 passive funds, split into nine broad asset classes, will be rated. However it is anticipated this coverage will be increased out based on customer requests and the availability of indices.

  Michael Holland, managing director at FE, commented:

  “The funds industry is moving towards a hybrid of using both active and passive funds together and there has been a gap in the availability of quality research on passive funds owing to their complexity. We have responded to this challenge with the FE Passive Fund Ratings.

  “What these ratings show is that past tracking ability of a passive fund can be used as a guide to how well that group will track an index in the future. The difference between the best and worst trackers/ETFs is large and makes a significant impact on the value of your investment. ”

 
Funds with the lowest tracking difference and error score the most highly, while funds over £100m in assets under management score higher than smaller funds with FE viewing fund size as a reasonable proxy for liquidity. 

  The number of crowns a fund receives is determined by an absolute score across all the components, with tracking difference ranking highest in terms of importance. For the full methodology of scoring see the attached document.

  To qualify to be ranked funds must have at least a three year track record and be available for sale in the UK. In addition FE only rates funds whose benchmarks reflect the main types of investment that a UK investor would be interested in. As a result funds and ETFs that track commodities indices, are leveraged or are reverse trackers, as well as Smart Beta products, have all been excluded.

  In terms of the methods used to track indexes the ratings are agnostic towards the whether a fund uses physical or synthetic replication of an index, although funds tend to be based on physical replication.

Meanwhile, to avoid confusion, the traditional crown rating will only apply to active funds. Passive funds will no longer be given an FE Crown Fund Rating, only an FE Passive Fund Rating.

  A new section dedicated to passives is available on www.trustnet.com and FE Analytics on 22 April, which includes a more detailed breakdown of the methodology and a complete guide to investing in passive funds. 

Notes to Editors -

About FE FE is an award-winning provider of ratings, investment research, data, software and performance analysis to the financial services industry. FE's suite of ratings covers all aspects of fund management: the FE Alpha Manager Ratings for portfolio managers; FE Crown Fund Ratings for funds; Group Awards to identify groups with an edge in different asset classes; Risk Scores to measure volatility; and the FE Adviser Fund Index as a reference for portfolios.

FE's products and services are designed to interpret and analyse data, helping financial advisers and private investors to stay well informed and ultimately make sound investment decisions. Respondents to a 2013 survey by The Platforum voted FE and FE Trustnet the most influential data providers in the marketplace, with 51% of the respondents nominating FE and 43% indicating FE Trustnet when asked which research providers they consulted before making investment decisions and picking funds.