A drop in its Process Pillar rating is the primary driver of Syntax Stratified LargeCap ETF's downgrade to a Morningstar Medalist Rating of Neutral from Silver. The portfolio maintains a cost advantage over competitors, priced within the cheapest fee quintile among peers.  

 The team managing this passive strategy earns the strategy an Average People Pillar rating. The strategy merits an Average Process Pillar rating. Independent of the rating, analysis of the strategy's portfolio shows it has maintained a considerable overweight position in liquidity exposure and volatility exposure compared with category peers. High liquidity exposure is attributed to stocks with a high trading volume, lending managers more flexibility. And high volatility exposure is rooted in stocks that have a higher standard deviation of returns. The strategy's parent organization is industry standard, albeit with some strong attributes like a competitive lineup success ratio and a strong risk-adjusted track record. This earns the firm an Average Parent Pillar rating.

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Morningstar's evaluation of this security's process aims to determine the likelihood that it will outperform its Morningstar Category benchmark on a risk-adjusted basis over the long term. Syntax Stratified LargeCap ETF earns an Average Process Pillar rating. 

The largest contributor to the rating is the parent firm's five-year risk-adjusted success ratio of 100%. The measure indicates the percentage of a firm's funds that survived and outperformed their respective category's median Morningstar Risk-Adjusted Return for the period. This fund tracks an index, which also increases its process rating. Historical data, like Morningstar's Active/Passive Barometer, shows that passively managed funds have generally outperformed their active counterparts, especially over longer time horizons. Lastly, the process is limited by the fund's unremarkable long-term risk-adjusted performance. This can be seen in its five-year alpha calculated relative to the category index, which suggests that the process has struggled over that period.

 This strategy tends to hold smaller, more growth-oriented companies than its average peer in the Large Value Morningstar Category. Analyzing additional factors, the fund has held stocks with higher trading volumes compared to Morningstar Category Peers in the past few years. More-liquid assets are easier to buy and sell without adversely moving their prices and tend to provide some ballast during market selloffs. They also are easier to sell to meet redemptions if a host of investors decide to leave the fund in a short period of time. In recent months, the strategy was more exposed to the Liquidity factor compared with its Morningstar Category peers as well. This strategy has also exhibited a tilt toward high-volatility stocks over these years, meaning it has invested in companies that have a higher historical standard deviation of returns. Such stocks tend to rise faster and fall harder than the broad market. High-volatility exposure contributes to stronger performance during bull markets, but often at the cost of losing more during downturns. Compared with category peers, the strategy also had more exposure to the Volatility factor in the most recent month. Furthermore, this strategy has leaned toward low-yield stocks over recent years, holding fewer companies with high dividend or buyback yields. This is demonstrated by the portfolio's low exposure to dividends or buybacks. While companies with high yields provide steady income payments, they may cut payouts if their earnings fall. In recent months, the strategy also had less Yield factor exposure than its peers. More information on a fund and its respective category's factor exposure can be found in the Factor Profile module within the Portfolio section. 

 The portfolio is overweight in consumer cyclical and consumer defensive relative to the category average by 6.6 and 4.6 percentage points, respectively. The sectors with low exposure compared to category peers are financial services and healthcare, underweight the average by 9.5 and 2.7 percentage points of assets, respectively. The portfolio is positioned across 504 holdings and its assets are more dispersed than peers in the category. In particular, 7.7% of the portfolio's assets are concentrated in the top 10 fund holdings, compared to the typical peer's 27.4%. And finally, in terms of portfolio turnover, looking at year-over-year movements, 23% of the fund's holdings have changed, whether through increasing, decreasing, or changing a position.

Average

Process

Syntax’s team receives An Average People Pillar rating. The most notable contributor to the rating is its parent firm's five-year success ratio of 100%. The measure indicates the percentage of a firm's funds that survived and beat their respective category's median return for the period. A low cost, with fees that rank in its category's cheapest fifth, also supports the rating. Fees reduce net returns, so the team has a lower expense hurdle to overcome. Lastly, the rating is limited by the instability of talent across its parent firm. The firm's asset-weighted manager tenure of four years suggests it could do more to retain portfolio managers.

People

Syntax has some investor-friendly attributes, but other attributes warrant caution, leading to an Average Parent Pillar rating. Even with an average pillar rating, Syntax has had impressive longevity among its product shelf. The firm's success ratio is 100%, meaning that 100% of its strategies have both survived and beaten their respective category median. A high success ratio indicates good performance and provides insight into a firm’s discipline around investment strategy and product development. Syntax has served investors well through its very competitive risk-adjusted performance, with an average five-year Morningstar Rating of 4.0 stars across its open-end and exchange-traded funds. Syntax's longest-tenured managers do not possess comparable experience as teams at other firms, a cause for concern. Specifically, average tenure within the firm is four years. As such, there is less confidence in the group's ability to manage capital through a full market cycle effectively.

Parent

Syntax Stratified LargeCap ETF

SSPY tracks an index that holds all constituents of the S&P 500 Index, reweighted to diversify related business risk.

SSPY uses a research-based approach to reweighting the S&P 500 constituents, with attention paid to related business risks. My analysis revealed SSPY's sophisticated methodology is supportive of a value tilt, which most likely contributed to SSPY's relatively strong performance last year. Unfortunately, SSPY was incapable of beating IVV in the long run, also owing to its value exposure.

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