ETF Strategy Fund Grade
The ETF Strategy Fund Grade uses a proprietary scoring and grading framework designed to reflect real-world fund due diligence
priorities from the perspective of professional wealth allocators - our primary user group. It evaluates ETFs relative to others
within the same general classification group across four core characteristics - fund fees, fund size, track record, and recent risk-adjusted
performance - providing a practical preliminary screening tool for comparing similar ETFs within a general classification group.
It does not assess the attractiveness of an ETF’s underlying investment exposure or consider the fund’s level of risk, and it is not
intended for comparisons across classifications.
How the Score is Produced
Each ETF receives an overall score on a 0-5 scale. This overall score is based on four component scores, each also on a 0-5 scale:
- Fees (Net Expense Ratio)
- Size (Assets Under Management)
- Risk-adjusted performance (Return-to-Volatility Ratio)
- Track record (Longevity)
To ensure appropriate comparative assessment, relevant components are measured against a general classification group defined by asset
class, continent, and level of economic development.
Component Scores
Fees (Net Expense Ratio) An ETF's fee level is compared with the range of fees observed within its classification group.
Lower fees score better, with the score reflecting where the ETF sits within the group's distribution. Specifically, the ETF with the lowest
fee receives a score of 5, and the ETF with the highest fee receives a score of 0. Scores for ETFs with TERs in between are calculated using
inverted min–max normalization. If a classification group contains only one ETF, a neutral score (2.5) is applied.
Size (Assets Under Management) An ETF's assets under management (AUM) are mapped to a score using predefined AUM bands ($10m, $50m, $100m, $500m, $2,000m). These bands
are designed to reflect common due-diligence checkpoints (typical minimum qualifying criteria) for our primary users, considering capacity,
liquidity constraints, and commercial sustainability. Within each band, the score increases smoothly through linear interpolation as AUM
rises. Funds at or above the top-band threshold ($2,000m) receive the maximum score, reflecting the benefits of scale, while smaller funds
score lower. Above this threshold, additional AUM does not increase the score, since incremental benefits are assumed to be minimal for our
primary user group.
Risk-adjusted Performance (Return-to-Volatility Ratio) Risk-adjusted performance is measured using a one-year return-to-volatility
ratio (RVR) and benchmarked against other ETFs in the same classification group. This metric is intended for short-term comparison over a consistent
horizon, capturing marginal differences among funds that track the same index (or a similar one) or otherwise provide comparable exposure, rather
than assessing the underlying exposure or strategy. ETFs that rank higher within their group receive higher scores. Specifically, the ETF with the
highest RVR receives a score of 5, and the ETF with the lowest RVR receives a score of 0. Scores for ETFs with RVRs in between are calculated using linear interpolation.
If a classification group contains only one ETF, a neutral score (2.5) is applied. If an ETF has less than one year of history, its RVR is set
to the classification-group average for scoring purposes. In this context, the metric captures nuanced advantages from manager skill, portfolio
implementation quality, and execution efficiency. It helps differentiate passive index-tracking funds that follow the same or a similar index
(e.g., a generic clone) and provides a measured uplift to active strategies that have delivered higher returns per unit of risk.
Track Record (Longevity) An ETF's age contributes to its score through predefined age bands (1-, 3-, 5-, and 10-year milestones).
These milestones align with commonly used professional-wealth due diligence thresholds and serve as a standardized proxy for operational tenure and commercial sustainability, while
also increasing the scope for users to evaluate strategy robustness across market cycles. Older funds score higher, with values increasing smoothly
within each band via linear interpolation. An ETF on its launch day, with no history, scores 0. Fully established, seasoned funds (> 10 years) receive
the maximum score of 5; beyond that point, no additional advantage is given, since a longer track record is assumed to provide negligible incremental
benefit to our primary user group and may reflect organizational or operational arrangements that are no longer relevant.
Combining the Components
The overall score is a static, weighted blend of four component scores. Fees, size, and track record are weighted equally, while risk-adjusted performance
receives a smaller weight (half the weight of each of the other three). The component weightings are intentionally calibrated to emphasize the structural
and stability factors that professional allocators view as primary risk mitigants, while still incorporating performance outcomes in a controlled way so
the final grade reflects a balance between operational quality and historical execution.
Translating the Score into a Grade
Within each asset class, ETFs are ranked by their overall score and raw grade threshold scores are set based on relative position: AAA at the 80th percentile
(top 20%), AA at the 66.67th percentile (top third), and A at the 60th percentile (top 40%). For each grade level (AAA, AA, and A), a Universe Quality Baseline
score is then calculated as the mean of the raw grade threshold scores for that grade across the five core asset classes used in the classification groups -
Equities, Fixed Income, Commodities, Alternatives, and Currencies. Finally, for each asset class, Universe Quality Baseline-adjusted grade thresholds are determined.
The adjusted threshold for each grade is the greater of the raw grade threshold score or 95% of the Universe Quality Baseline for that grade. This serves as a
cross-asset-class quality check, meaning an ETF may need to both meet the percentile threshold and clear a minimum absolute score floor tied to overall market
quality to earn its grade. For grading purposes, Property/Real Estate ETFs (a component of the Alternatives asset class) are ranked on a standalone basis.
Important Information
The ETF Strategy Fund Grade is provided for informational purposes only and does not constitute investment advice. The methodology and resulting scores/grades
are provided "as is," without any guarantees as to accuracy or completeness, and should not be viewed as statements of fact. The ETF Strategy Fund Grade relies
on input data (including, without limitation, net expense ratio, assets under management, performance, volatility, and fund age) that may be incomplete, outdated,
or inaccurate, which could affect a fund's component scores, overall score, relative ranking, and grade. The blending of component scores using fixed weights
reflects subjective methodological judgments, and alternative weighting choices could produce materially different results. In addition, fund classification
involves judgment; an ETF may be misclassified or could reasonably be placed in a different classification group, which may materially affect its score and
grade given the peer-relative nature of the methodology. Accordingly, users should not rely solely on the ETF Strategy Fund Grade when making investment
decisions, and use of the grade is at your own risk. ETF Strategy accepts no liability for any losses arising from reliance on the methodology, scores,
or grades. Always verify key information with issuers and third-party sources, and consult a qualified investment professional before making any investment decisions.