Meet the STARS system. It's a product of our friends at Standard & Poor's -- since 1987, S&P analysts have assigned more than 1,500 stocks ratings of between one and five stars, based on how well they're expected to perform relative to a benchmark over the coming year.
How well have these ratings predicted the future? Well, the companies receiving five stars (equivalent to a "Strong Buy" recommendation) have beaten the S&P 500 in 15 of 19 years. Four-star companies have appreciated by a factor of more than 10.
For the curious, here are a few companies recently ranked as five-star investment ideas by the folks at S&P: Best Buy (NYSE: BBY ) , Abercrombie & Fitch (NYSE: ANF ) , Disney (NYSE: DIS ) , and Fastenal (Nasdaq: FAST ) .
What to do
This might have you licking your chops, wondering if you could invest in a basket of top-rated companies. Well, rejoice. Standard & Poor's has just launched two new indices based on these companies: the S&P U.S. STARS Index and the S&P Europe STARS. Better still, this means that it's likely that we'll soon see investment vehicles available to permit us to invest in the indices. For example, just as the exchange-traded (ETF) SPDR Trust (AMEX: SPY ) is based on the S&P 500 index of 500 of America's biggest companies, these indices will, respectively, include and monitor those companies deemed most promising by S&P analysts.
A word of warning, though: When index funds or ETFs start using these indices, don't assume they're all the same. Examine them closely. Some might charge considerably more in fees than others, for example. Here are two ETFs, for instance, that might seem similar: iShares MSCI Emerging Markets Index Fund (NYSE: EEM ) and Vanguard Emerging Markets VIPERs ETF (AMEX: VWO ) . While the former sports an expense ratio (annual fee) of 0.77%, the latter's is 0.30%. The former holds about 300 stocks, sports a turnover ratio of 12%, and has a yield of 1.16%, while the latter holds about 800 stocks, has a turnover ratio of 26%, and has a yield of 1.42%.
Learn more
I encourage you to learn much more about ETFs in our ETF Center. It features info on why you might want to consider ETFs for your portfolio, how ETFs stack up against mutual funds, how to develop an investment strategy with ETFs, pitfalls to avoid, and how to avoid ETF imposters.
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