If You Own Mutual Funds Or ETFs, Don’t Ignore This Metric

T Rowe Price Lipper Ad


This is an ad from T.Rowe Price promoting their retirement funds. But ads like these are all too common in the mutual fund industry. Open any business or investing magazine and you’ll find all sorts of metrics based around Lipper. Lipper ranks, Lipper leaders, Lipper indexes, Lipper Fund Awards… But then what do they mean and how are these different from, say the market benchmark, the S&P 500 index?

Lipper is a fund analytics company that’s been in business since 1973. It was started by a Securities Analyst, A. Michael Lipper, but was sold to Thomson Reuters in 1998. Lipper monitors and benchmarks active mutual funds, and now even ETFs, based on a number of criteria not just annual returns.

Lipper Average

The most common metric used by Mutual Fund companies is the Lipper Average. This is the average annual return of a fund among its peers, within a particular category, as categorized by Lipper. If a particular fund scored better than the average in its category, fund companies highlight this fact to promote the fund.

In the above ad, T Rowe Price is highlighting the fact that all the funds in their Retirement Portfolio, beat their 5 year Lipper Average.

Lipper Rank

Invesco Lipper Ad

RANK 2% of Lipper Global Flexible Portfolio Funds Category (3 or 235 funds)

Here’s another ad from Invesco promoting their Balanced Risk Allocation Fund, ranked 2 percentile of Lipper’s Global Flexible Portfolio. Lipper Rank can be expressed as a percentile or in absolute numbers. In the above ad, Invesco has published both. This particular fund is in the 2nd percentile, 3rd out of 235 funds, in the Global Flexible Portfolio category.

Rankings are calculated for 1, 3 or 5 years among peers for a specific asset classification (small cap, large cap, emerging markets etc.).

Lipper Category

Lipper groups funds into five categories.

  • Equity
  • Mixed Equity
  • Fixed Income &
  • Money Market

Lipper Classification

From the above, funds are further classified based on the type. Examples are Emerging markets, S&P 500, Large Cap etc.

Lipper Benchmark/Lipper Index

Lipper has a series of benchmarks or indexes to track mutual funds based on their classification. For example there is a Lipper benchmark to track mutual funds that track S&P 500 called Lipper S&P 500 Fund IX, there is a Lipper benchmark to track emerging market mutual funds called Lipper Emerg Mkt Fd IX and so on.

There are over 160 of these indexes which track the total return performance of the largest funds within Lipper categories.

So what’s the difference between a Lipper Classification and a Lipper Benchmark? Lipper Benchmarks are applied only to active mutual funds whereas a Lipper Classification can be applied to passive ETFs as well as active mutual funds.

Lipper Leader

You may find some funds being touted as a Lipper Leader. This is an exclusive club in the mutual funds’ (& ETFs’) worlds. To be a Lipper Leader, a fund has to be among the top 20% of its peers when ranked against a specific metric – Total Return, Consistent Return, Capital Preservation, Expense and Tax Efficiency (US only ). Each of these categories is given a separate ranking – 5 being the highest and 1 being the lowest.

Lipper Leader ratings for USAGX

Lipper Leader ratings for USAGX

In the above example, USAGX, a precious precious metals mutual fund offered by USAA, is a Lipper Leader with a top ranking for both Total Return and Consistent Return and rankings of 1, 3 and 4 for Capital Preservation, Tax Efficiency and Expense respectively.

You can see how this can be useful to align your goals with your assets.

Criticisms And Gaming Lipper Statistics

You could be highly ranked by Lipper and you could’ve beaten your competition, but could still have lagged the market when it comes to returns which, ultimately is what matters to the individual investor.

Survivorship Bias

Lipper Average only tracks active mutual funds. A mutual fund that lagged behind the Lipper Average last year could’ve beaten the Lipper average this year for the same period! How could this be you may ask. Investment companies employ tricks such as merging lagging funds, to renaming them to closing them altogether. All these affect rankings even for past periods.

If a fund family touts that 100% of their funds have beaten the Lipper Average, it could very well mean the lagging funds were closed or merged into better performing funds. It does not necessarily mean that the investment company has extraordinarily talented managers.

Incubator Bias

Here’s another trick mutual fund companies employ to mislead investors. A mutual fund company would incubate a series of funds with its own money but wouldn’t release details about these funds to the public. Those that beat the Lipper Average are opened to the public and those that didn’t make the cut are quietly closed down. All their funds now beat the Lipper Average!

This is unfortunately, quite legal, if not ethical. Investors fall for this all the time.

As An Investor, How Can Lipper Ratings Help Me?

For one, you could use Lipper Ratings to screen mutual funds that meet multiple criteria, not just whether it beat the market or not.

Goto to Reuters’ Fund & ETF Screener Site
You can screen funds based on all the criteria I’ve explained in this post or you could restrict your screenings to just the Lipper Leaders.

Let me illustrate how useful this tool can be to the individual investor. Here’s a comparison of two ETFs that track the same index and are almost identical.

VWO and EEM both track the MSCI Emerging Markets index, but are from different fund companies. VWO is from Vanguard and EEM is from Blackrock.

EEM Vs. VWO (Emerging Markets ETF)

Very similar returns of EEM and VWO (Emerging Markets ETFs). Using Lipper metrics to find out which one's better

On the face of it, it looks as though it doesn’t make much difference which ETF I choose. Both are passive ETFs that attempts to track a well known index.

But when I compare Lipper Ratings for these ETFs, here’s what I get:

EEM Lipper Leader Rating

EEM Lipper Rating

VWO Lipper Leader Rating

VWO Lipper Rating

Vanguard’s VWO is the clear winner here in all categories. You can see how useful this is when comparing mutual funds or ETFs with similar goals.

My Thoughts

Lipper Metrics are just a tool to help the investor navigate the ocean of ETFs and mutual funds. Having an understanding of this rating system should go a long way in making the right decision when it comes to investing.

The sample ads accompanying this post are meant for illustrative purposes only. This is not necessarily an endorsement by Money Cone.

Long on VWO. No positions in the other funds mentioned in this post.

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25 thoughts on “If You Own Mutual Funds Or ETFs, Don’t Ignore This Metric

  1. Thanks for the insightful recommendation to assess this metric. I also appreciate you covering the caveats, including how funds can disguise their performance by closing out lagging funds and merging others together. This is a great informative post. Thanks!

  2. Mutual funds can be really tricky which is why we don’t invest in them too much. We are much more index people.

  3. I haven’t used Lipper much when I’ve made investments but I always look at how they compare to the markets. I didn’t realize Lipper was sold that recently to Thomson Reuters. I thought it was a lot longer for some reason. Nice tips MC! -Sydney

  4. The Reuters fund screener is interesting! In terms of the Lipper results – the way funds use them in advertising has always bothered me. Good info on survivorship bias.

  5. Be cautious of your financial adviser. You pay them fees and they put you in under performing funds requiring more fees. For many, sticking to an index approach will be the most profitable overall.

  6. As always, very interesting post. I never really put much thought into the mechanics of Lipper. I have my own process I use to pick funds based on info at morningstar, but I am sure I could do a better job utilizing more information.

    • Stick with what works best. I don’t use Lipper exclusively either, but it does bother me when I see Lipper average mentioned in every Mutual Fund ad, which can be misleading to an uninformed investor.

  7. Excellent information MC. I’ve read a little about survivorship bias, but the incubator bias is new to me. It goes to show how important these ratings are to successfully marketing funds to the broad general public; people like to put their money with winners…as dangerous as that is.

  8. What I like best about Lipper metrics is shown in your EEM vs. VWO comparison. I can further slice “large cap value” or “mid cap growth” funds that seem similar on the surface into smaller buckets to understand how each might react to future possible conditions.

    Awesome, well reasoned article. Thanks for the info!

  9. wow, you put a lot of time and energy into this article and it shows. I like how you educated about survivorship bias, a really important concept. My advice, go with low cost index funds and make your investing decisions easy!

  10. I’ve always heard of Lipper ratings but have never really taken the time to find out what they are. Thanks for the run down.
    That survivorship bias is a pretty big detractor for using it though.

    • Good tool actually LaTisha. But understand how it can be manipulated. That’s what I’ve tried to highlight in this post. Ads are always misleading to the uninformed investor.

  11. I just try to stay with American mutual funds as they are considered very good. But, if I ever decide to invest more money into mutual funds, then I will definitely consider Lipper metrics. Thanks,

  12. Quiet shameful in admitting that although I have a huge sum invested in MFs, I haven’t cared about Lipper metrics so far. thanks for the comprehensive information

    • You are not alone SB! Lipper is used more by mutual fund companies than by individual investors.

      But an individual investor can use Lipper metrics to make an informed decision when picking mutual funds or etfs. Lipper does provide some excellent screening tools as I’ve highlighted in this post.

  13. Long on VWO too. Quite comprehensive info. Personally, I think the easiest approach to investing is just determine your asset allocation and invest in diversified US and International Stocks, and some bonds or cash equivalents.

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