What Morningstar Ratings Tell You About an ETF

When you're comparing ETFs on your investing platform, you'll often see a row of stars next to a fund's name.

Five stars looks reassuring - but how much should those ratings actually influence what you buy?

The short answer is: they're a useful starting point, not a decision-maker.

Here's what Morningstar is actually measuring, and what it means for you.

What Morningstar Ratings Mean

Morningstar uses two different types of ratings, and they often get mixed up.

The star rating is backward-looking. It measures a fund's past performance, adjusted for risk and fees, compared with other funds in the same category.

Five stars means the fund has performed well relative to its peers historically, but importantly, it says nothing about what it will do next.

The star rating is backward-looking & measures a fund's past performance.

The Medalist Rating takes a more forward-looking view.

It focuses on three main pillars - People, Process and Parent - and also incorporates fees (Price) into the overall rating.

Based on these, Morningstar gives a view on whether the fund is likely to outperform peers after costs over time.

For passive funds, Process is essentially about how well-designed the index-tracking approach is and whether it's likely to hold up consistently over time.

Both ratings can give you a useful lens on a fund, but they're Morningstar's view, not a guarantee. Think of them as one informed opinion rather than the final word.

What If An ETF Has No Rating?

A fund needs at least three years of return history before it can receive a Morningstar star rating. So if an ETF has no stars, it just means the fund hasn't been around long enough to qualify.

It doesn’t necessarily mean it’s a risky bet, but many new investors prefer to stick to more established funds.

Before writing off an unrated fund, look at: Is it new? Is it very small or niche? Is it hard to classify because it tracks an unusual index? The answers will tell you more than the absence of a rating.

Does the ETF Actually Do Its Job?

For passive investors, the most important question isn't what Morningstar thinks of the fund. It's whether the ETF is actually delivering the index exposure it promises.

Two measures help with this.

Tracking difference is the gap between what the ETF returned and what its index returned over a given period.

If an ETF tracking the MSCI World returned 7.8% while the index returned 8%, the tracking difference is 0.2%. A small negative tracking difference is normal because of fees, but a large or persistent gap is worth questioning.

Tracking error measures how consistently (or inconsistently) the ETF deviates from its index over time.

A low tracking error means the fund moves closely in line with its benchmark day to day.

A high tracking error means unpredictable deviation, which matters if you're relying on the fund to behave like the index.

Both figures are usually available on ETF data sites or the fund's factsheet. Comparing the ETF's actual performance against its benchmark over one, three, and five years gives you a much clearer picture than a star count alone.

Beyond tracking, a few other practical things are worth checking before you commit to an ETF.

• Look at the Total Expense Ratio, which is the annual fee expressed as a percentage of your investment.
• Check how large the fund is, since very small funds can sometimes be wound down or have wider trading costs.
• Consider how long it has existed, and whether the index it tracks actually makes sense for what you're trying to achieve.

Small checks, but they add up to a much clearer picture than stars alone.

What This Means for You

Morningstar is a legitimate and widely used research tool. These ratings can help you ask smarter questions, and give you a quick sense of how a fund compares to its peers.

But - they should not make the decision for you.

A five-star rating tells you about the past, and the Medalist Rating tells you what Morningstar analysts think about the future. Neither one tells you whether the ETF tracks the right index for your goals, whether it's doing a good job of following that index, or whether the cost is reasonable given what you're getting.

For most ETF investors, the best approach is to use Morningstar as a starting point.

The real work is understanding the index, checking the cost, and making sure the fund actually does what it says it does. That's what turns a good-looking rating into a fund worth owning.