Morningstar Risk Rating

Morningstar Risk Rating: Definition, How It Works, and Practical Use

What it is

The Morningstar risk rating is a five-level assessment Morningstar applies to mutual funds and ETFs to summarize historical risk and risk-adjusted performance. It helps investors compare funds within the same Morningstar category by measuring variability in monthly returns, with extra emphasis on downside volatility.

How the rating is calculated

• Morningstar analyzes monthly return data and emphasizes negative return variation.
• Risk is measured for up to three timeframes: 3-, 5-, and 10-year periods. These measures are weighted and averaged into an overall rating.
• Funds with fewer than three years of performance history are not rated.
• Morningstar publishes two related outputs:
• A five-tier risk classification by percentile within each category: low (lowest 10% of measured risk), below average (next 22.5%), average (middle 35%), above average (next 22.5%), and high (top 10%).
• A 1-to-5 star metric that reflects historical risk‑adjusted return—higher stars indicate stronger past risk‑adjusted performance. Funds with greater volatility incur a larger “risk penalty” and may receive fewer stars even if raw returns are similar.

How to use the rating

• Use Morningstar ratings as a starting point for screening and comparing funds within a category, not as a standalone buy/sell signal.
• Combine the rating with analysis of fund strategy, holdings, fees, manager tenure, and how the fund fits your goals and risk tolerance.

Limitations and criticisms

• Ratings are relative to peers in the same category and do not directly account for broader market conditions or absolute suitability.
• Historical risk-adjusted performance is an imperfect predictor of future returns. Research (e.g., a Vanguard study) has found Morningstar ratings did not reliably predict future outperformance versus benchmarks; in some findings, lower-rated funds produced greater excess returns.
• Because methodology emphasizes past monthly variation, ratings can shift when market regimes change or if a fund’s style performs differently from its category.

Other rating providers

Several firms and publications also produce fund ratings, including Thomson Reuters Lipper, Zacks, S&P, Forbes, and U.S. News. Many investors consult multiple sources and perform independent analysis.

Example

As an illustration, the iShares Nasdaq Biotechnology ETF (IBB) was rated as having above-average risk (three stars on the weighted 3/5/10-year basis) while delivering strong long-term returns—reflecting that higher historical returns can accompany elevated volatility.

Bottom line

Morningstar’s risk ratings are a useful, standardized way to compare funds’ historical volatility and risk‑adjusted returns within peer groups. Treat them as an initial filter and combine them with deeper due diligence and consideration of current market context before making investment decisions.