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Morningstar Votes for Mutual Funds

In his blog, Random Roger , Nusbaum disagrees, saying that because ETFs track indexes and don't have a manager actively selecting stocks, the argument isn't really relevant.

"Running an index is not about adding value, as implied in the article -- it is about mimicking. You mimic with computers, not an investment committee sitting around a big-old money table debating sector and style rotation."

Marc Gerstein, director of investment research for Reuters.com, believes Morningstar just doesn't get ETFs.

"I think it's just that they're geared to thinking a very specific way because of their experience covering open-end funds," Gerstein says.

"There may be a specific reason to be weary of certain ETFs" but when it comes to Morningstar's analysis of ETFs, "I think they're missing the point that there are many different ways to play a market" he says.

Comments from Cal-Riverside's Misha add to that point.

"ETFs cannot be ranked because it's indexing," he says, adding that you can give them a star rating based on past performance, but it's not like mutual funds where there is a manager behind the wheel. "You can't blame the ETF if it does well or not."

Morningstar has been rating mutual funds for more than two decades and, in March, launched an ETF rating service that, like the mutual fund service, looks at past risk/return profiles.

However, the ETF ratings are a little different because they are adjusted to assume that investors pay $20 commission per transaction on a $10,000 investment. You should note, though, commissions have been coming down. A June study by Greenwich Associates found that the typical U.S. institution cut the commissions paid to brokers from 2005 to 2006 due partially to a shift to electronic trading.

As originally published, this story contained an error. Please see Corrections and Clarifications.
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