InvestSMART ETF Star Ratings: how they work and how to use them
Choosing between hundreds of ETFs can feel overwhelming - especially when they often look very similar and track the same markets. InvestSMART's ETF Star Ratings are designed to cut through the noise and help investors compare ETFs on the things that matter most for long-term investing.
What are InvestSMART's ETF Star Ratings?
The InvestSMART ETF Star Rating system is a framework that assesses the quality of Australian-listed ETFs on five key quantitative metrics and assigns each a rating from one to five stars.
A higher-rated ETF scores more strongly across the characteristics that tend to support better long-term outcomes, such as lower costs, better liquidity and reliable index tracking.
On the flip side, a lower-rated ETF may have higher costs, lower liquidity or weaker tracking accuracy than its peers.
The star ratings are designed to make it easier to compare ETFs with similar objectives. They aren't a recommendation to buy or sell an ETF.
How ETFs are rated
For all ETFs, InvestSMART focuses on the following core metrics:
Fees
Fees are measured using the management expense ratio (MER), which reflects the ongoing cost of investing in an ETF. Lower fees allow more of your returns to stay invested and compound over time, and even small differences can add up over long periods, especially when ETFs track the same index.
Fund size
Fund size, based on funds under management, can be a key indicator of stability. Larger ETFs benefit from economies of scale and are less likely to be wound up. Smaller funds are more vulnerable to closure, which can force investors to sell at an inconvenient time.
Liquidity
Liquidity, assessed using daily trading volumes, reflects how easily an ETF can be bought or sold on the ASX at a fair price. Higher volumes usually mean better liquidity and smoother, lower-cost trading.
Bid/offer spread
This is the average percentage difference between the bid and ask price and represents a hidden cost of investing. Narrower spreads reduce the cost of getting in and out of an ETF.
Tracking error
This looks at how closely an ETF tracks its underlying benchmark. A low tracking error indicates the ETF is delivering the exposure it promises, minus fees. A higher tracking error can be a sign of inefficiencies or implementation issues.
For active or more complex ETFs, an additional factor is considered:
Outperformance relative to the benchmark
For active ETFs, we consider the ability of the fund to outperform the benchmark over multiple timeframes. Consistent outperformance is rewarded with a higher rating.
Each factor is weighted based on its importance to investor outcomes and combined into an overall score, which is then reflected in a one-to-five-star rating. The system is reviewed regularly to make sure it stays aligned with market conditions and investor needs.
How InvestSMART uses the star ratings
The ratings guide our selection of ETFs for our investment portfolios. We typically prefer ETFs with a four- or five-star rating, as this implies the ETF rates well across the key metrics used in our assessment.
How investors can use the star ratings
The star ratings can be used as a filtering and comparison tool. They can help investors:
Compare similar ETFs
When choosing between ETFs with the same objective, the star rating can help highlight those that have stronger fundamentals.
Shortlist ETFs for further research
A higher star rating suggests an ETF scores well across the key metrics, making it a good option to look into further.
Gauge fund quality over time
Ratings are reviewed regularly, so investors can use them to monitor changes in ETF quality.
Keep in mind, a higher rating doesn't guarantee higher future returns.
Want to compare ETFs? Use our online ETF filter tool to narrow options by investment category or geographical focus, and see InvestSMART's star rating for each ETF.
Frequently Asked Questions about this Article…
InvestSMART ETF Star Ratings are a one-to-five star framework that assesses Australian-listed ETFs on key quantitative metrics to help everyday investors compare ETFs that often look similar. The ratings highlight funds that score well on features linked to better long-term outcomes — like lower costs, stronger liquidity and reliable index tracking — but they are not a direct buy or sell recommendation.
InvestSMART evaluates ETFs using five core metrics: fees (measured by the management expense ratio or MER), fund size (assets under management), liquidity (daily trading volumes on the ASX), bid/offer spread (the average percentage difference between buy and sell prices), and tracking error (how closely the ETF follows its benchmark). For active or complex ETFs, they also consider outperformance versus the benchmark over multiple timeframes.
ETF fees, expressed as the MER, are the ongoing cost of holding the fund and reduce the amount of return that stays invested and compounds over time. Even small fee differences can compound into meaningful differences in long-term returns, especially for ETFs that track the same index.
Use the star ratings as a filtering and comparison tool: compare similar ETFs by objective, shortlist higher-rated funds for further research, and monitor ratings over time to spot changes in fund quality. Remember a higher star rating flags stronger fundamentals but does not guarantee future returns, nor is it a specific buy or sell signal.
Tracking error measures how closely an ETF follows its underlying benchmark after fees; a low tracking error means the ETF is delivering the exposure it promises. Higher tracking error can indicate implementation issues or inefficiencies that cause the ETF to diverge from its benchmark.
Liquidity, measured by daily trading volumes on the ASX, shows how easily you can buy or sell an ETF at a fair price — higher volume generally means smoother, lower-cost trading. The bid/offer spread is a hidden trading cost: narrower spreads reduce the cost to enter and exit the ETF, while wider spreads increase it.
Yes — InvestSMART uses the star ratings to guide ETF selection for its portfolios and typically prefers ETFs rated four or five stars, since those score well across the key metrics used in the assessment.
For active or more complex ETFs, InvestSMART includes an additional factor that assesses consistent outperformance relative to the benchmark across multiple timeframes, and consistent outperformance can contribute to a higher star rating.
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