A striking feature of Morningstar's ratings for exchange-traded funds is that none of those that track the ASX200 have been awarded a Gold rating. Instead, analysts have applied Bronze ratings across all providers.

By contrast, a handful of S&P 500-tracking ETFs carry a Gold rating, as well as several Vanguard multi-asset ETFs.

This was raised by a Morningstar reader in this month's Friday Fundamentals webinar when he asked: can you give an insight into why STW is only Bronze rated?

STW or SPDR S&P/ASX 200 is Australia’s largest ETF, with about $3.7 billion in assets (October 2019). The ETF was launched by State Street Global Advisors in 2001 and aims to own every stock in the S&P/ASX 200 Index - thereby delivering portfolio and performance outcomes closely matching the benchmark.

So why do Morningstar analysts apply Bronze ratings across all ASX200-tracking ETFs?

morningstar asx 200 etfs exchange traded funds

Source: Morningstar Direct (Data as at 18 April 2019)

Morningstar fund analysts assign the ratings on a five-tier scale with three positive ratings of Gold, Silver, and Bronze, a Neutral rating, and a Negative rating.

The Analyst Rating is based on the analyst's conviction in the fund's ability to outperform its peer group and/or relevant benchmark on a risk-adjusted basis over the long term.

Morningstar evaluates funds based on five key pillars: Process, Performance, People, Parent, and Price.

If a fund receives a positive rating of Gold, Silver, or Bronze, it means Morningstar analysts think highly of the fund and expect it to outperform over a full market cycle of at least five years.

Analyst rating scale

Gold: Best-of-breed fund that distinguishes itself across the five pillars and has garnered the analysts' highest level of conviction.

Silver: Fund with advantages that outweigh the disadvantages across the five pillars and with sufficient level of analyst conviction to warrant a positive rating.

Bronze: Fund with notable advantages across several, but perhaps not all, of the five pillars—strengths that give the analysts a high level of conviction.

Neutral: Fund that is unlikely to deliver standout returns but also unlikely to significantly underperform, according to the analysts.

Negative: Fund that has at least one flaw likely to significantly hamper future performance and that is considered by analysts an inferior offering to its peers.

Writing about BetaShares Australia 200 ETF (A200), Morningstar associate director, manager research Alexander Prineas justified the Bronze rating as follows:

"A200 offers a diversified Australian equity portfolio for an incredibly low annual fee of 0.07 per cent. Rival exchange-traded funds were already cheap, but BetaShares has taken cost to a new low, charging less than half the price of the nearest rival," he says.

"[But] active funds offer strong competition, too. Our preferred active managers have been able to outperform Australian equity benchmarks over the long run, even after accounting for their higher cost, and there is reason to believe the best active managers can continue to deliver.

"However, not all active funds consistently deliver, so good quality passive vehicles such as A200 stack up well against the average fund."

Similarly, for STW, analyst Sarah Fox wrote:

"Our preferred active managers have been able to outperform Australian equity benchmarks over the long run, even after accounting for their higher cost, and there is reason to believe the best active managers can continue to deliver."

"However, not all active funds cut the mustard, so good-quality passive vehicles stack up well against the average fund."

In short: ASX200-tracking ETFs are low maintenance, cheap, great for set-and-forget investors.

However, Morningstar analysts say they underperform when compared with some high-performing Gold-rated active Australian equity funds. Therefore, while analysts think highly of these ETFs, their conviction in their ability to outperform the peer group is somewhat diminished.