Standard and Poor’s Capital IQ unit has launched a new ratings service for passive funds, including traditional index funds and ETFs.

The firm will assign ratings of platinum, gold and silver to what it determines as the best passively managed funds, based on quantitative and qualitative measures.

S&P Capital IQ will compare passive funds using historic tracking errors, charges and the culture and experience of the teams managing the funds. The firm’s researchers will also focus on how groups try to add return to offset fees and expenses, and on the assessment of the inherent operational risks. The attributes of the underlying indices will also be considered, including liquidity and replicability, says S&P.

Initially S&P Capital IQ will focus on funds from a select group of providers and tracking major global, European, US and UK equity benchmarks, said Kate Hollis, the firm’s director of fund research. In the future, the passive fund research effort will be expanded to cover emerging market equities, single European country equity indices and parts of the fixed income market, Hollis added.

“We believe the best way to determine which passive funds can achieve a grading, i.e. which funds have achieved their objectives in the past and are likely to achieve them in future, is by combining the quantifiable, such as the costs and historic track record, with the qualitative or the way in which performance has been achieved and the people and processes involved,” said Hollis.

S&P's passive fund ratings will be paid for by investors under a subscription model, said Hollis.

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