What are we looking for?
Canadian mutual funds and ETFs that recently became eligible for a Morningstar Star Rating – and earned four or five stars on their first report card.
The screen
If you’ve ever researched a mutual fund or ETF, you’ve probably come across Morningstar’s familiar one-to-five star rating. The rating has been around for decades and has become a popular shortcut for investors looking to compare funds. Yet many investors don’t realize that a fund must have at least three years of performance history before it can receive a star rating. Until then, even promising new funds remain unrated and can be easy to overlook.
The star rating compares a fund’s performance with others in the same category after accounting for fees and risk. A Canadian bond fund, for example, is measured against other Canadian bond funds – not against global stock funds or technology-focused strategies. The rating also puts greater emphasis on more recent results and considers how much risk a fund took to achieve those returns. In simple terms, funds that have delivered better results with less downside risk tend to earn higher ratings.
Of course, a strong star rating doesn’t guarantee future success. Markets and investment teams change, and even highly rated funds can go through difficult periods. That said, Morningstar’s research has shown that, on average, funds with higher ratings have tended to outperform those with lower ratings over time. While investors should never rely on a single measure when selecting investments, the star rating is a very useful starting point.
This week, I used Morningstar Direct to identify funds and ETFs launched in mid-2023 that have crossed the three-year threshold and qualified for a star rating for the first time. Think of them as the graduating class. Out of roughly 72 funds and ETFs (counting only the oldest share class of each fund), I selected those that earned four or five stars right out of the gate – evidence that they have outperformed many of their peers during their first three years in the market.
What we found
The table accompanying this article lists the funds and ETFs that met the screen. It includes each fund’s category, star rating, management expense ratio, inception date, trailing performance, asset allocation and estimated net asset flows over the past 12 months.
I’ve also included Morningstar’s Medalist Rating, which is our forward-looking assessment of a fund’s ability to outperform its peers in the future. Unlike the star rating, which is based on past performance, the Medalist Rating evaluates the strength of the investment team, the quality of the firm and the investment process itself. While I didn’t screen specifically for Medalist Ratings, it’s notable that many of the qualifying funds have earned gold, silver or bronze ratings, suggesting they may continue delivering strong results.
As always, investors should pay close attention to a fund’s category when comparing ratings. A five-star bond fund and a five-star equity fund may both rank highly against their peers, but they can serve very different roles in a portfolio.
This article does not constitute financial advice. Readers are encouraged to conduct their own research before buying or selling any of the funds or ETFs listed here.
Ian Tam, CFA, is director of investment research for Morningstar Canada.