Morningstar's ETF Rankings Have No Analytical Value (ETFs: EWO, EWM)

Roger Nusbaum submits: The Wall Street Journal has an article up (sub. req.) about Morningstar implementing rating system for ETFs based on the same star rankings it uses to rank open end funds.

The article does a good job isolating a couple of flaws with the idea. My impression from the article is that the ratings are based on backward looking price data. IShares Austria (EWO) gets a five star rating, according to the article, for its three-year performance. I own EWO for several reasons including lending money for Eastern European expansion, public pension money diverting systematically into the stock market at a healthy economy (relative to other EMU countries).

I am not aware of any other catalyst to own Austria. I went to the Morningstar page for EWO but could not find any of the content referenced in the Journal article. For now we can’t know if they have any insight about Austria. This is supposed to be effective today (3/3/06) so maybe it will be on the site later. I have read many reports (pre-star ranking) about ETFs but can’t recall any type of effort to apply forward-looking analysis.

Also according to the article, iShares Malaysia (EWM) gets only one star. Over the last two years EWM is about unchanged while the S+P 500 is up low double digits. I don’t know much about Malaysia other than there is a lot of manufacturing there and the country has a healthy current account surplus. Given some of the issues of late with countries that have current account deficits it might make sense that money will find its way into countries, like Malaysia, that have surpluses.

I have no idea if my initial thought about Malaysia holds any water or not but I will be curious to see if Morningstar offers any constructive thoughts either way but I’m not holding my breath.