What is it?
Diversification in a fund is determined by two variables: the relative weight of the 10 largest holdings in a fund and the fund's turnover ratio, which is the rate at which a fund replaces its holdings on an annual basis.
Why is it important?
A greater diversity of weightings of a fund's constituents provides better diversification when comparing funds, and reduces the likelihood of a few large holdings dragging down a fund's overall performance. At the same time, higher fund turnover can lead to higher costs for owning a fund, and turnover in index funds should generally be low, which is why we've included turnover in our fund rankings. While this measure gives a slight edge to equity funds, its lower weighting in the overall rank means low costs and great index tracking ability will be the largest determinants of fund rank.
How is it measured?
There are two components used to measure diversification: the overall weight of the fund's 10 largest holdings and the published annual turnover ratio for each fund. Each component receives a 10 percent weighting to determine the total 20 percent weighting for diversification in the overall rank.
Additional Data Information
Fund data are provided by Interactive Data Corp. and Morningstar Inc. ETF metrics and rankings are updated daily.
About our Best Fit Scorecard
Our Best Fit Scorecard, provided for all funds meeting the Best Fit criteria (see above), offers a comparison across all categories of Best Fit funds to highlight how funds compare to a wider selection of funds in Cost, Tracking Error, Bid/Ask Ratios, and Holdings Diversity (see above for discussion of how we determine those measures). Funds receive overall scores in each category, with the lowest third of scores receiving designation of "Typical", the middle third "Good", and the top third "Excellent".
Data, rankings, and scores provided for U.S. News Best Fit ETFs are provided for informational purposes only. They do not constitute any recommendation to buy or sell any fund and are not intended to be a substitute for professional advice. Always seek the advice of a relevant professional with any questions you may have about any financial decision you are seeking to make.
If you have additional questions about US News Best Fit ETFs, please contact us.