The Morningstar Rating, widely known as the star rating, is a score from one to five stars that the research firm Morningstar, Inc. gives to investment funds based on their past risk-adjusted performance compared with similar funds. It covers mutual funds, exchange-traded funds, closed-end funds and some other pooled products. Five stars mean a fund was among the best in its category over the measured periods; one star means it was among the worst.
Morningstar was founded in Chicago in 1984 by Joe Mansueto and introduced the star rating in 1985. The stars are backward-looking. Morningstar also publishes a separate, forward-looking Morningstar Medalist Rating (Gold, Silver, Bronze, Neutral, Negative), and the two are often confused. A rival peer-ranking system is Lipper ratings, published by LSEG Lipper.
Morningstar Rating in plain terms
Think of restaurant stars handed out after the fact. An inspector looks at how a restaurant has cooked over the past few years, compares it only with restaurants of the same kind, and marks it down if the food was brilliant one week and awful the next. The stars describe what already happened, not what tonight's meal will be like.
Morningstar's fund stars work the same way. A fund is compared with funds that invest in similar things, its returns after costs are counted, and bumpy results are penalised. A five-star fund has had a good record; whether that record continues is a separate question.
How the star rating is calculated
Each fund is placed in a Morningstar Category of funds with similar holdings, such as US large-cap growth or global bonds. A fund needs at least 36 months of history to be rated. Morningstar then calculates its Morningstar Risk-Adjusted Return, which deducts sales charges such as front-end and deferred loads and penalises variation in returns, especially on the downside. Funds in each category are ranked on this measure and the stars are assigned on a curve:
- Five stars. The top 10% of the category.
- Four stars. The next 22.5%.
- Three stars. The middle 35%.
- Two stars. The next 22.5%.
- One star. The bottom 10%.
Separate ratings are produced for three, five and ten years. The overall rating is a weighted average of those available, rounded to the nearest whole star. For a fund with at least ten years of history the weights are:
- , and are the ten-, five- and three-year star ratings.
A fund with five to ten years of history uses 60% of its five-year and 40% of its three-year rating; one with three to five years uses the three-year rating alone. For example, a fund rated 3 stars over ten years, 4 over five years and 5 over three years scores , which rounds to four stars overall. Each share class of a fund is rated separately, because fees differ between them.
The Morningstar Medalist Rating
The Medalist Rating is Morningstar's forward-looking judgement of whether a fund is likely to beat a relevant index or category over a full market cycle, after fees. It rests on three pillars: People (the quality of the portfolio managers and analysts), Process (the soundness of the strategy) and Parent (the firm's stewardship and culture). Gold, Silver and Bronze signal expected outperformance with differing levels of conviction; Neutral and Negative do not.
Morningstar's analysts assign the pillar scores for funds they cover, and a statistical model estimates them for the rest. In 2022 Morningstar announced it would combine its earlier analyst-led Analyst Rating and model-based Quantitative Rating into this single Medalist scale. Morningstar also publishes a Sustainability Rating, shown as globes, for sustainable investing screens, and a separate star rating for individual stocks based on the share price compared with Morningstar's estimate of fair value.
Uses and criticism
Star ratings appear on fund platforms, in a fund fact sheet and in fund advertising, and advisers use them as a first filter. Research has repeatedly found that investors move money toward funds that gain stars and away from those that lose them, which gives the ratings commercial weight. In the US, quoting ratings in retail communications must meet FINRA Rule 2210's conditions on rankings.
Critics point out that:
- Past performance persists weakly. Morningstar itself says the stars describe the past and are not a prediction; top-rated funds often fall back toward average.
- Categories shape results. A fund's stars depend on which peer group it is placed in, and funds that close or merge disappear from the record, creating survivorship bias.
- Costs dominate. Because returns are measured after fees, low-cost funds with a modest expense ratio tend to rate well, which is useful but means the stars partly re-describe costs.
The stars therefore work best alongside measures such as Sharpe ratio, standard deviation and tracking error, and alongside an investor's investment objective and risk tolerance.