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Passive Fund Rating FAQs


The FE Trustnet team answers some of the most frequent questions asked by advisers and investors in relation to the FE Passive Fund Crown Rating.


What was wrong with the old FE Crowns system of rating funds?

The FE Crown Fund Rating rewards funds for outperforming their designated benchmark, which is not applicable to passive funds which try and replicate their index. A tracker that does a perfect job of tracking its benchmark is unlikely to achieve four or five FE Crowns because there will always be active funds that outperform it.  Nevertheless, the objective of the FE Passive Crown Rating remains the same as the active crown rating: To help advisers make a more informed decision by highlight the best performing funds based on their objectives.

How do the Passive Crown rankings work? There seems to be fewer funds with the maximum 5 crowns.

The number of crowns is determined by an absolute score based on these three components.

- Tracking error
- Tracking difference
- Fund size

Unlike the FE Crown Fund Rating, we will not be distributing funds across the ranks according to quartile positioning. For this reason, it could be that there are no five crown rated funds, though this is of course highly unlikely.

 
What’s the difference between tracking error and tracking difference?

Tracking error calculates the volatility of the difference of the returns between a fund and its benchmark. For example, a fund that perfectly replicates the performance of its underlying index every day over a 12 month period, its tracking error will be 0. However, if a fund deviates from its index on a regular basis it will have a higher tracking error, even if the tracking difference after 12 months is 0.

Tracking difference calculates the annualised relative performance of a fund compared to the underlying index. For example, if a fund returns 10 per cent over 12 months and an index returns 12 per cent, the tracking difference is 2 per cent.

 
Why do you consider fund size when you rate funds? This isn’t a very good proxy for liquidity

FE needed a common element that is comparable across funds. Larger funds should have economies of scale which make the fund cheaper to run and can be passed onto the end investor. Smaller funds may not have this advantage and therefore performance could be worse as a result.

 
Why don’t you consider cost when rating passives?

Where fund charges are expensive the impact of these costs will be evident in the tracking difference, so cost is indirectly considered this way. However at present the majority of funds aren’t very transparent when it comes to costs and therefore are not comparable. Using size as a proxy was considered the best alternative. 

 
If a fund group cuts their charges will this be reflected in the ratings?

The Passive Fund Rating scores are calculated over 3 years and so the effects of these cuts would only gradually become apparent through the tracking error. We constantly monitor changes and review any effects to ensure our methodology represents an accurate depiction of the market.


Why do you only rate 250 passives?

FE only rates funds whose benchmarks reflect the main types of investment that a UK investor would be interested in. This means a number of passive funds that track commodities indices, leveraged and reverse trackers, as well as “smart beta” products, are excluded.

 
Why isn’t Vanguard US Equity tracker rated? It’s a mainstream market which FE says it rates.

There are thousands of indices in the market and FE tries to subscribe to them all to ensure we have access to as much information as possible for the benefit of our customers. Unfortunately we don’t have access to this fund’s particular benchmark and so it is not possible to rate it. We are always looking at ways to increase our indices list and so it is certainly possible that it will be rated in future.

 
Why aren’t there any rated commodity ETFs?

FE only rates funds whose benchmarks reflect the main types of investment that a UK investor would be interested in. This means a number of passive funds that track commodities indices, leveraged and reverse trackers, as well as “smart beta” products, are excluded.

 
Why isn’t ETFS Physical Gold rated?

FE only rates funds whose benchmarks reflect the main types of investment that a UK investor would be interested in. This means a number of passive funds that track commodities indices, leveraged and reverse trackers, as well as “smart beta” products, are excluded

 
Why aren’t any smart beta products rated?

Smart beta products are not passive funds, they are actively managed funds that use passive investments, therefore they don’t qualify to be rated.

 
Why aren’t small cap trackers given a rating?

Passive small cap funds are rated, however they are quite uncommon and so there may be fewer than more traditional passive sectors.


Example rated small cap funds:

- ETFS Russell 2000 US Small Cap GO UCTS ETF
- Source Russell 2000
- DB X-Trackers Russell 2000 UCITS ETF


Some funds and ETFs price at different times of the day. Does this affect tracking error?

To some degree it will do. We have endeavoured to create special benchmark series, or offset performance numbers appropriately for such occurrences, but in some cases this has not been feasible. In these cases, we have awarded the fund the middle tracking error score, so that they are not particularly disadvantaged.

How can a fund be the best performing passive but have a low crown rating?

As trackers’ sole purpose is to replicate a chosen index, those that outperform are penalised in the same way as those that underperform. A passive that outperforms its index by 2 per cent will have the same tracking difference as one that underperforms by 2 per cent. Having a high tracking difference will have negative impact on the passive crown rating.

 

 

Data provided by FE. Care has been taken to ensure that the information is correct, but FE neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.

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