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Summary The Small Cap Blend style ranks last in Q3’15. Based on an aggregation of ratings of 30 ETFs and 659 mutual funds. FNDA is our top-rated Small Cap Blend ETF and PXQSX is our top-rated Small Cap Blend mutual fund. The Small Cap Blend style ranks last out of the 12 fund styles as detailed in our Q3’15 Style Ratings for ETFs and Mutual Funds report. It gets our Dangerous rating, which is based on an aggregation of ratings of 30 ETFs and 659 mutual funds in the Small Cap Blend style as of July 20, 2015. See a recap of our Q2’15 Style Ratings here. Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the style. Not all Small Cap Blend style ETFs and mutual funds are created the same. The number of holdings varies widely (from 24 to 2526). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Small Cap Blend 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 Eight 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 Four mutual funds are excluded from Figure 2 because their total net assets are below $100 million and do not meet our liquidity minimums. The Schwab Fundamental U.S. Small Company Index ETF (NYSEARCA: FNDA ) is the top-rated Small Cap Blend ETF and the Virtus Quality Small-Cap Fund (MUTF: PXQSX ) is the top-rated Small Cap Blend mutual fund. FNDA earns a Dangerous rating and PXQSX earns an Attractive rating. The Global X Guru Small Cap Index ETF (NYSEARCA: GURX ) is the worst-rated Small Cap Blend ETF and the Investment Managers Chartwell Small Cap Value Fund (MUTF: CWSVX ) is the worst-rated Small Cap Blend mutual fund. Both earn a Very Dangerous rating. Escalade (NASDAQ: ESCA ) is one of our favorite stocks held by Small Cap Blend funds and earns our Very Attractive rating. Since bottoming out in 2008, Escalade’s after-tax profit ( NOPAT ) has grown by an impressive 55% compounded annually. NOPAT margin has increased tenfold to 10% over the same timeframe. Return on invested capital ( ROIC ) has also improved to 10% from 1% in 2009. Despite the strong turnaround since the economic recession, ESCA remains undervalued. At the current price of $18/share, ESCA has a price to economic book value ( PEBV ) ratio of 0.9. This ratio implies that the market expects the company’s profits to permanently decline by 10%. If Escalade can grow NOPAT by just 6% compounded annually for the next five years , the stock is worth $22/share – a 22% upside. Alon USA Energy (NYSE: ALJ ) is one of our least favorite stocks held by Small Cap Blend funds and earns our Very Dangerous rating. Since 2011, NOPAT has declined by 28% compounded annually. Alon currently earns a 5% ROIC, which is less than a quarter of the 22% earned in 2005. Investors have overlooked the deterioration of Alon’s fundamentals, and the stock is overvalued. To justify the current price of $18/share, Alon must grow NOPAT by 12% compounded annually for the 15 years . For a company that has struggled with earning consistent profits for years, this expectation appears to be overly optimistic. Figures 3 and 4 show the rating landscape of all Small Cap Blend 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 Max Lee receive no compensation to write about any specific stock, style, 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. (More…) 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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