Capital, Alpha, and Stacked Efficiency grades explained
Each ETF page shows one or two letter grades: Capital Efficiency, Alpha Efficiency, or both. This article explains what each grade measures, how it is calculated, and what it does not tell you.
Why two grades instead of one
Best after you've skimmed at least one or two ETF pages — grades make more sense once you've seen them next to a fund's chart and write-up.
ETFs on this site play different roles. Some sit in the equity sleeve of a stack. Others provide diversifying return that doesn't depend on whether stocks go up. Grading both on the same scale misses the point.
Capital Efficiency applies to equity-side ETFs: standard index funds, leveraged ETFs, and long/short equity funds. It answers how much equity return this ETF delivers per dollar of capital compared to holding SPY alone.
Alpha Efficiency applies to alpha-side ETFs: managed futures, merger arbitrage, systematic alternatives, global macro. It answers how much this sleeve earns above its own cost of capital, independent of equity markets.
Some ETFs (stacked ETFs) hold both an equity sleeve and an alpha sleeve inside a single fund. MATE and RSST, for example, hold roughly 100% equity and 100% managed futures simultaneously on the same dollar of capital. These get both grades, one for each sleeve.
Capital Efficiency: how it works
The baseline is SPY. If an ETF delivers exactly what SPY delivers, it earns a B. Better than SPY earns an A or A+; worse earns a C or D.
Three things go into the score:
How much more (or less) this ETF has returned annually vs SPY over the same period, using up to five years of live history.
A leveraged ETF with 2× exposure (like SSO) delivers the same equity position as SPY on half the capital. That frees the other half for diversifying sleeves. This capital liberation is credited in the score. SPY frees nothing (it uses all your capital to deliver 1× equity), so its capital-freed contribution is zero.
Leveraged ETFs have embedded borrowing costs: the expense ratio plus a spread above what SPY pays. SSO costs roughly 0.5% per year more to run than SPY, and UPRO roughly 1% to 1.5% more. This cost is subtracted from the score.
An A+ grade (like UPRO) means the fund frees two-thirds of your capital for other sleeves and its historical excess return has more than covered borrowing costs. A B means SPY-equivalent. C or D means high costs, poor return, or both.
Alpha Efficiency: how it works
The baseline for Alpha Efficiency is the risk-free rate, roughly what you'd earn sitting in T-bills. An alpha sleeve that earns nothing above T-bills is expensive complexity. One that earns meaningfully above T-bills is doing its job.
For stacked ETF alpha sleeves (like the managed futures sleeve inside MATE), the hurdle is slightly higher: the risk-free rate plus the borrowing cost of running a futures overlay, typically around 1.5% to 2% per year. The sleeve needs to clear that full cost before it is adding value.
A grade of A means the sleeve has meaningfully cleared its cost: it has been returning about 4% to 8% per year above the hurdle rate. A B means it is covering costs with a thin margin. A C means it is roughly break-even. A D means it is not clearing its cost of capital.
Low market sensitivity gets a bonus in the Alpha Efficiency formula. A fund that earns its return with near-zero correlation to equity is more valuable as a diversifier than one that earns the same return but moves with the market.
What the grades don't tell you
Grades are based on historical returns, typically one to five years of live NAV data. They capture what happened. An A+ today could have a rough next three years; a C might be early in a recovery.
They don't measure whether a strategy has a structural reason to earn (that's in the ETF write-up), whether a fund is appropriate for your portfolio, or how funds interact with each other. A D-grade alpha fund might still be a useful tail-risk hedge. Two B-grade funds with genuinely different return profiles can combine better than two A-grade funds that move together.
Treat grades as a filter, not a ranking. They flag funds that look interesting but have lagged their cost hurdle. They do not replace reading the write-ups.
N/A and provisional grades
Funds with less than four months of live history show N/A. Grades need enough data to mean something.
Funds with four to eleven months show a calculated grade marked provisional. The window is too short to have tested the fund across different market conditions. Grades become standard after a full year of history. They're recalculated each January using data through December.
Educational content only; not investment advice, not a recommendation to buy or sell any security. Past performance does not guarantee future results. Leveraged and alternative funds involve substantial risk.