Analysts have been ranking stocks with "outperform" or "buy" calls for years, but in the 10-year history of ETFs, no major research firms have been giving overall rankings to ETFs. S&P will be selling the new service to brokerages and the buyside with the equity ranking. The move is likely to spur research firms looking to take advantage of the growing ETF market to follow in its footsteps, industry consultants said.
"It allows us to look at an ETF as a security, which is necessary now that ETFs have become a must-have for asset allocations among financial advisors," said Ken Leon, senior director in equities at S&P and designer of the service. S&P decided to launch the service now because the ETF market has grown rapidly over the past five years and investors need to be able to compare offerings.
Morningstar Equity Research creates and sells analytics on ETFs, but it doesn't rank them like individual stocks. Jeffrey Ptak, head of ETF research, couldn't be reached for comment.
In the first quarter of this year, 25 new ETFs were listed, bringing the total to about 660. By 2010, the number of ETFs is expected to reach 2,000, with an overall value of about $2 trillion, according to recent Morgan Stanley research. "ETFs are still in the first quarter of their game," Leon said. The growth is primarily a result of people investing in ETFs as an alternative to mutual funds. "As the market grows, this could be something that would add value, and S&P will have the advantage of being the first to make that move," said Ben Poors, alternative investments analyst at Cerulli Associates.
In its initial launch, S&P's research service will analyze and rank all equity ETFs, which make up about 80-85% of the overall market. The next step will be to cover specialty, fixed income and commodity ETFs. The research will take into account the performance, risk and cost factors of the individual holdings of the ETFs, and then calculate a weighted average to get an overall opinion on it.
"It should happen, and it will happen eventually. [S&P is] onto something," said Dan McCabe, head of M7 Ventures, an ETF issuer. But he said it could be unfair or inaccurate if the ratings don't take into account different structures of ETFs, or else it will be like comparing apples and oranges.
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