Morningstar Inc. is poised to start ranking exchange-traded fund model portfolios, the Chicago-based research firm said at its annual ETF Invest Conference on Thursday.

ETF model portfolios - a way for advisers to provide investors with an actively managed portfolio of exchange-traded funds - have grown in popularity together with ETFs.

Morningstar, which defines ETF managed accounts as portfolios of securities where more than 50 percent is invested in ETFs, tracks more than 330 ETF managed portfolios, with about $22 billion in assets. Nearly a third of those were launched over the past three years.

Major brokerage firms, like Morgan Stanley Smith Barney and Wells Fargo Advisors LLC, offer several such portfolios to their advisers. Last year, Charles Schwab & Co. bought Winward Investment Management Inc., a provider of model ETF portfolios, in response to demand from advisers.

Such portfolios appeal to advisers who want to use ETFs, but don't feel comfortable managing them, Tom Lydon, president of Global Trends Investments, which manages $95 million, told Reuters at the conference.

As these managed portfolios are active and have no performance benchmarks, it's difficult to judge how well they're doing, he said. This assessment gets even harder as more advisers pitch their own ETF model portfolios to other advisers.

With so many model portfolios out there, it's very hard to say which one is better than the other, Lydon said. The new rankings, however, should help weed out some of the bad apples in the ETF model portfolio world, he said.

Among them are advisers who appear to be gaming the system, Christian Magoon, an ETF consultant, told Reuters at the conference.

In some cases, an adviser managing a number of model ETF portfolios might have only one that does well. The adviser will close the underperforming portfolios and only tout the performance of the survivor.

Morningstar will disclose when advisers stop reporting on some portfolios, Andy Gogerty, an ETF managed portfolio strategist, said during the conference.

Some advisers also market ETF performance based on imaginary returns rather than actual historical performance. They report only what a portfolio would have returned had it existed over a longer period of time, said Richard Ferri, Portfolio Solutions LLC, an adviser with $1 billion in assets under management.

These issues raised concerns from the Securities and Exchange Commission last year, but no enforcement or action resulted. Indeed, Morningstar won't allow advisers to submit hypothetical historical returns, Gogerty said.

The firm may eventually apply its star ratings to these portfolios, Gogerty said, describing the move as the next logical step.

For the rankings, which will be launched by the end of the year, Morningstar will classify the portfolios it tracks and rank them based on disclosed historical performance and its own analysis of their investment strategies.

With accountability in place via these new rankings, Lydon said it will become survival of the fittest for ETF model portfolios.

But some advisers worry that it would be a conflict of interest for Morningstar to rank ETF model portfolios, because the research firm has its own offerings through its subsidiary, Morningstar Investment Services.

Seems like a huge potential conflict, with at least an appearance of impropriety, Milo Benningfield, an independent financial adviser with Benningfield Financial Advisors, said in an email to Reuters.

Morningstar said it will rank its own portfolios and disclose which ETF model portfolios it runs.

(Reporting by Jessica Toonkel; Additional reporting by Aaron Pressman; Editing by Bernadette Baum)

(This story was corrected to fix name to Andy Gogerty, not Arenberg in paragraphs 12 and 13, and to fix dateline)