BlackRock has received the most top ratings in the latest rebalance of the FE Passive Crowns, beating rival passive investment house Vanguard.
The biannual rebalance by FE saw 268 passive funds rated on a scale of between one and five FE Passive Crowns, depending on how well they track their benchmarks over three years and other measures. Passive funds are scored on a quantitative basis
Following the latest rebalance, 19 BlackRock funds have emerged with five FE Passive Crown ratings, compared with Vanguard’s 12.
However, BlackRock 19 five crown-rated trackers account for just 30 per cent of the firm’s eligible offerings, compared with Vanguard’s 60 per cent.
The latest rebalance took in an additional 40 funds, with a particular focus on global tracker funds and exchange-traded funds (ETFs) as demand for those strategies has grown more recently.
Oliver Clarke-Williams, portfolio manager at FE, said: “More people are investing in passive funds and are increasingly choosing passive exposure to global markets.”
July’s rebalance saw eight funds previously unrated due to lack of three-year performance history awarded five crown ratings, seven of which were global equities funds.
Previously unrated funds awarded a five FE Passive Crown rating
Source: FE
Three other funds – iShares Core MSCI Japan IMI Ucits ETF, iShares MSCI EMU Ucits ETF, and Amundi ETF MSCI Emerging Markets – were also awarded five crowns, having previously held lower ratings.
Two funds saw their five crown ratings fall to two crowns in the latest rebalance: SPDR Barclays Sterling Corporate Bond Ucits ETF and UK Gilts fund iShares UK Gilts All Stocks Index.
Meanwhile, the iShares Europe ex-UK Index, HSBC S&P 500, and DB X-Trackers S&P 500 Ucits ETF also saw their five crown ratings slip to three crowns.
On a sector basis, the rebalance revealed that UK Gilt strategies were among some of the funds with the best tracking ability, with more achieving five crown ratings proportionately.
Some 54 per cent of UK Gilts funds eligible for a FE Passive Crown rating were awarded five crowns in the recent rebalance, compared with just 18 per cent of global equities funds,
Clarke-Williams explained: “The high number of UK Gilts funds which have been awarded five Passive Crown ratings is largely down to the fact that they are highly liquid and easy to replicate, whereas with global equities you’re having to buy a large amount of stocks from every region in the world.”
UK and North American equities sectors had the most five crown-rated ratings, boasting 14 and 13 funds respectively. No property or sterling corporate bond trackers were awarded the top rating.
Source: FE
Clarke-Williams said: “With none of the sterling corporate bond and property funds receiving a five Passive Crown rating, it is clear that not all trackers are equal and some markets are significantly more difficult to replicate than others.”
He added: “What these ratings show is that past tracking ability of a passive fund can be used as a guide to how well that group will track an index in the future.
“The difference between the best and worst trackers/ETFs is large and makes a significant impact on the value of your investment.”
On a performance level, however, the situation for global equities and UK Gilt strategies were reversed, as the former dominated other sectors.
Indeed, despite just 18 per cent of global equities strategies achieving a five crown rating, it was the best performing FE-Rated Passive Investments sector over three years.
The average UK Psv Global Equities fund returned 56.17 per cent over the three years to 30 June 2017. The best performer was the $1.8bn iShares Edge MSCI World Minimum Volatility Ucits ETF, a five crown-rated fund, which delivered a total return of 66.87 per cent.
Conversely, the worst performing sector was the UK Psv UK Gilts sector, where the average fund returned just 20.89 per cent over three years. The best fund in that sector was the SPDR Barclays 15+ Year Gilt Ucits ETF, which was up by 38.8 per cent.
The best performing FE-rated passive fund over three years was the iShares NASDAQ 100 Ucits ETF. The three crown-rated fund delivered a 92.88 per cent over the period. It was closely followed by the Amundi Nasdaq 100 ETF, which returned 92.26 per cent.
The worst performing FE-rated passive fund over three years was the £1.2bn five crown-rated iShares UK Gilts 0-5yrs Ucits ETF, which managed to return just 5.32 per cent.
Only passive funds with benchmarks reflecting traditional investment strategies are included, with funds tracking alternative assets, such as commodities, leveraged/short funds and ‘smart beta’ products are excluded.
FE uses three components when calculating the FE Passive Crown Fund ratings, with tracking difference the most influential component, followed by tracking error and fund size.
Tracking difference calculates the annualised relative performance of the fund compared with the underlying index. Tracking error, meanwhile, calculates the volatility of the difference of the returns between a fund and its benchmark.
FE also identifies fund size as an important determinant of ratings, highlighting the need for a certain level of scale to make physical replication economical. FE also views ETF size as a proxy for liquidity.
For further information about the FE Passive Crown rating system, click here.