Best And Worst Q1’16: Large Cap Value ETFs, Mutual Funds And Key Holdings

By | March 4, 2016

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The Large Cap Value style ranks second out of the twelve fund styles as detailed in our Q1’16 Style Ratings for ETFs and Mutual Funds report. Last quarter , the Large Cap Value style ranked first. It gets our Neutral rating, which is based on aggregation of ratings of 46 ETFs and 915 mutual funds in the Large Cap Value style. See a recap of our Q4’15 Style Ratings here. Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the style. Not all Large Cap Value style ETFs and mutual funds are created the same. The number of holdings varies widely (from 8 to 1021). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Large Cap Value style should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2. Figure 1: ETFs with the Best & Worst Ratings – Top 5 Click to enlarge * Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings Four ETFs are excluded from Figure 1 because their total net assets are below $100 million and do not meet our liquidity minimums. Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5 Click to enlarge * Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The Legg Mason BW Dynamic Large Cap Value Fund ( LMBGX , LMBEX ) is excluded from Figure 2 because its total net assets are below $100 million and do not meet our liquidity minimums. The FlexShares Quality Dividend Index Fund (NYSEARCA: QDF ) is the top-rated Large Cap Value ETF and the Brown Advisory Equity Income Fund (MUTF: BAFDX ) is the top-rated Large Cap Value mutual fund. Both earn a Very Attractive rating. The Global X Super Dividend US ETF (NYSEARCA: DIV ) is the worst-rated Large Cap Value ETF and the Copeland International Risk Managed Dividend Growth Fund (MUTF: IDVGX ) is the worst-rated Large Cap Value mutual fund. DIV earns a Neutral rating and IDVGX earns a Very Dangerous rating. Eaton Corporation (NYSE: ETN ) is one of our favorite stocks held by KDHIX and earns an Attractive rating. Eaton was featured as a Long Idea in December 2015. Over the past decade, Eaton has grown after-tax profits ( NOPAT ) by 14% compounded annually. The company currently earns a 9% return on invested capital ( ROIC ), up from just 4% in 2009. Despite long-term improvement in fundamentals, ETN remains undervalued. At its current price of $57/share, ETN has a price to economic book value ( PEBV ) ratio of 0.9. This ratio means that the market expects Eaton’s NOPAT will permanently decline by 10% from current levels. If Eaton can grow NOPAT by just 7% compounded annually over the next decade , the stock is worth $70/share today – a 23% upside. Advance Auto Parts (NYSE: AAP ) is one of our least favorite stocks held by Large Cap Value ETFs and mutual funds. AAP earns a Very Dangerous rating and landed on February’s Most Dangerous Stocks list. From 2010 to the last twelve months, Advance Auto Parts’ NOPAT has declined by 2% compounded annually. Over this time, Advance Auto Parts’ ROIC has declined from 12% to 5%. With the continued deterioration of the business, AAP is overvalued. To justify its current price of $153/share, Advance Auto Parts must grow NOPAT by 10% compounded annually for the next 15 years . This expectation is at odds with Advance Auto Parts declining profitability over the past few years. Figures 3 and 4 show the rating landscape of all Large Cap Value ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst Funds Click to enlarge Sources: New Constructs, LLC and company filings Figure 4: Separating the Best Mutual Funds From the Worst Funds Click to enlarge Sources: New Constructs, LLC and company filings D isclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, style, or theme. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Scalper1 News

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