Ranking Funds
Indexes have come along way since Burton Malkiel and Jack Bogle championed ‘‘buying the market’’ more than four decades ago. These gauges are now engineered to capture different sectors, themes or factors more efficiently, according to whoever’s making the index. Funds still passively hold portfolios determined by these benchmarks, but these portfolios are as consciously constructed and backtested as any active manager’s selection.
In rating ETFs, Bank of America is considering a fund’s momentum and how closely it tracks its benchmark -- as well as its management fee and how easily it trades -- to designate it more attractive, attractive or less attractive using a numeric score from one through three. Each fund also is tagged with a favorable, neutral or unfavorable view on its ‘‘category’’ -- such as large cap stocks weighted by market capitalization, or the health-care sector -- to help clients choose between funds, even if the bank holds a negative outlook on a particular strategy.
Despite BofA shunning the simple ‘‘buy, hold, sell’’ terminology used for stocks, asset managers still want to know why their fund is ranked as more or less attractive than its competitors, Bartels said. State Street Corp.’s funds, for example, stand out positively in most sector groupings, while BlackRock Inc., which runs similar funds, doesn’t score as well due to higher expenses and tracking error, she said.
‘Little Offended’
Issuers’ responses have broadly been positive but “some people are a little offended that a lot of their ETFs wound up in that bucket of ‘attractive,’” Bartels said. “Attractive is attractive. We’re not saying that you’re not attractive, we’re really looking for those very fine tails.”
BlackRock declined to comment on BofA’s ratings. But the world’s largest money manager believes that careful analyses of ETF holdings by Wall Street will encourage institutional use, and it expects to see more of it, spokesman Ed Sweeney wrote in an email. “What’s in the index counts most,” he wrote.
Other analysts question how Bank of America will gauge the performance of its recommendations. BofA plans to track outcomes and tweak weightings in its model if needed.
New Tricks
The move to provide research broadly on ETFs is a departure for banks, but not a revolution. Citigroup Inc. formalized a unit last year to help clients use ETFs, while firms like Goldman Sachs Group Inc. have recommended options strategies on the funds for years. Others including Morgan Stanley, UBS Group AG and Wells Fargo & Co. have strategists in their wealth management groups looking at ETFs, some of which have ratings.