TheStreet.com Ratings initiated coverage of 21 exchange-traded funds and two closed-end funds that accrued a sufficient track record of risk and performance data by the end of October.
Eight of the ETFs that began trading in September 2006 received our top rating level of excellent. Six of them earned the highest possible A+ rating for risk-adjusted performance over the last year. Each fund tracked indices covering narrow sectors of our economy.
Several of the newly rated funds are members of the PowerShares family tracking FTSE Research Affiliates indices. The interesting wrinkle with FTSE Research Affiliates indices is how they decide on the weightings of each of the stock holdings within the index.
In the olden days, the purpose of indexing was to calculate a single statistic that could give you a good understanding of which way the market was heading. Bigger companies do represent more of the market than smaller companies. So, it was only natural that indices such as the
would choose to use a market capitalization weighting, where big companies account for a larger portion of the index than smaller companies.
If instead the purpose of indexing is to allocate stock holdings by their best chances to go up in value, then bigger is not always better. PowerShares FTSE Research Affiliates attempts to use individual company
fundamentals to make allocation decisions. The theory is that fundamentals such as book value, cash flow, sales and
dividends may point to the better companies with higher probabilities of price appreciation.
Over the year ended Oct. 31, 2007, the PowerShares FTSE RAFI ETFs that bolster the argument for this indexing strategy include the A+ rated
, up 36.99%; the A+ rated
, up 34.88%; the A+ rated
Telecommunications & Technology Sector
, up 20.04%; and the A rated
, up 18.67%.
Interestingly, the index criteria did not keep super-large, super-profitable companies from making the cut;
make up 19.2% and 14.2%, respectively, of the Energy ETF, while
is the largest holding, at 10.8%, of the Basic Materials ETF. Likewise,
, is the top allocation of the Telecom/Tech ETF at 16.3%.
TheStreet.com Ratings also initiated coverage with "excellent" ratings on four ETFs in the iShares family, managed by Barclays Global Fund Advisors. The
iShares S&P Global Utilities Index
earned an A+ rating with a one-year return of 29.83%, as did the
iShares S&P Global Industrials Index
with a one-year return of 27.38%, and the
iShares S&P Global Cons Staples Index
, up 21.00%.
iShares S&P Global Materials Index
outpaced them all, returning 54.93%, but still lagged the others with an A rating due to its higher volatility.
Two closed-end funds also reached their one-year anniversary and were awarded initial ratings of "good." The
BlackRock Real Asset Equity Trust snagged the ticker symbol BCF, which was surrendered back to the
by Burlington Coat Factory after being acquired by Bain Capital back in April 2006. This fund holds 37.3% mining shares, 19.5% oil and gas, 7.4% chemicals and 7.2% forest products. Half the holdings (52.6%) are U.S. along with 12.0% Canadian, 11.3% British and 7.3% Australian. The fund returned 23.51% for the year, earning an initial B rating.
Doing significantly better with a one-year return of 204.88%, the
Morgan Stanley China A Share Fund invests in the A-shares of Chinese companies on the Shanghai and Shenzhen Stock Exchanges. Of these companies, 5% are in Hong Kong with the remainder in mainland China. The sector allocation is made up of 18.7% banks, 13.1% coal, 7.2% iron/steel and 6.4% commercial services. The fund's initial B- rating resulted from a mixture of outstanding performance and moderately high volatility.
TheStreet.com Ratings condenses the available fund performance and risk data into a single composite opinion of each fund's risk-adjusted performance. This allows the unbiased identification of those funds that have historically done well and those that have underperformed the market. While there is no guarantee of future performance, these Investment Ratings provide a solid framework for making informed, timely investment decisions.
All the funds listed below have reached their one year anniversary.
Funds rated A or B are considered buy-rated based on a track record of higher-than-average risk-adjusted performance. Funds at the C level are rated as "hold," while underperformers at the D and E levels our model ranks as "sell."
For a detailed explanation of each level of our rating levels, click
Kevin Baker became the senior financial analyst for TSC Ratings upon the August 2006 acquisition of Weiss Ratings by TheStreet.com, covering mutual funds. He joined the Weiss Group in 1997 as a banking and brokerage analyst. In 1999, he created the Weiss Group's first ratings to gauge the level of risk in U.S. equities. Baker received a B.S. degree in management from Rensselaer Polytechnic Institute and an M.B.A. with a finance specialization from Nova Southeastern University.