Morningstar Risk Rating
Candlefocus EditorMorningstar's risk rating system assigns a score of one (1) to the worst performers in a fund's peer group, and a score of five (5) to the best. This score is a good indicator of a fund's historical performance but it is still limited in that it only looks at the performance of the fund’s peers. To get a full picture of a fund’s risk, investors may wish to look at Morningstar’s category and peer-group ratings.
Category ratings provide a broad picture of fund risk by comparing a fund with its category peers without considering the fund's actual peer group. Morningstar assigns a rating of one (1) to five (5) to funds in each category, with a one (1) rating indicating a fund is the worst performer in its category and a five (5) indicating the fund is the best performer.
Meanwhile, peer-group ratings compare the fund to its actual group. The Morningstar risk rating assigns a rating of one (1) to five (5) to funds in each peer group, with a one (1) indicating the lowest risk and a five (5) indicating the highest risk.
Even though the Morningstar risk rating is an important indicator of risk, investors should take other factors into account. Investors should also look at returns, fees, and portfolio construction when evaluating risk. In addition, investors should look into other sources of information such as fund literature, a fund’s website, or reports from independent financial services firms.
Overall, the Morningstar risk rating is a helpful tool for investors who want to compare mutual funds and ETFs. The system assigns a score to indicate how a fund has historically performed relative to its peers. However, investors should use this tool in combination with other sources of information to take into account a fund’s total risk and make an informed decision.