Tag Archives: attractive

Q4 2015 Investment Style Ratings For ETFs And Mutual Funds

Summary Our style ratings are based on the aggregation of our fund ratings for every ETF and mutual fund in each style. The primary driver behind an Attractive fund rating is good portfolio management (stock picking) combined with low total annual costs. Cheap funds can dupe investors and investors should invest only in funds with good stocks and low fees. At the beginning of the fourth quarter of 2015, only the Large Cap Value and Large Cap Blend styles earn an Attractive-or-better rating. Our style ratings are based on the aggregation of our fund ratings for every ETF and mutual fund in each style. See last quarter’s Style Ratings here. Investors looking for style funds that hold quality stocks should look no further than the Large Cap Blend and Large Cap Value styles. Not only do these styles receive our Attractive rating, they also house the most Attractive-or-better rated funds. Figures 4 through 7 provide more details. The primary driver behind an Attractive fund rating is good portfolio management , or good stock picking, with low total annual costs . Attractive-or-better ratings do not always correlate with Attractive-or-better total annual costs. This fact underscores that (1) cheap funds can dupe investors and (2) investors should invest only in funds with good stocks and low fees. See Figures 4 through 13 for a detailed breakdown of ratings distributions by investment style. All of our reports on the best & worst ETFs and mutual funds in every investment style are available here . Figure 1: Ratings For All Investment Styles (click to enlarge) To earn an Attractive-or-better Predictive Rating, an ETF or mutual fund must have high-quality holdings and low costs. Only the top 30% of all ETFs and mutual funds earn our Attractive or better rating. The State Street SPDR Dow Jones Industrial Average ETF (NYSEARCA: DIA ) is the top rated Large Cap Value fund. It gets our Very Attractive rating by allocating over 51% of its value to Attractive-or-better-rated stocks. International Business Machines (NYSE: IBM ) is one of our favorite stocks held by DIA and receives our Attractive rating. Over the last decade, IBM has grown after-tax profit (NOPAT) by 8% compounded annually while doubling NOPAT margins. In addition to strong NOPAT growth, IBM has improved its return on invested capital ( ROIC ) to 12%, from 9% in 2005. Despite the strength in its business, IBM shares remain undervalued. At its current price of $140/share, IBM has a price to economic book value ratio ( PEBV ) of 0.8. This ratio implies that the market expects IBM’s NOPAT to permanently decline by 20%. Even if IBM can only grow NOPAT by 2% compounded annually for the next five years , the stock is worth $211/share today – a 51% upside. The ProFunds Small Cap Fund (MUTF: SLPSX ) is the worst rated Small Cap Blend fund and overall worst-rated style mutual fund. It gets our Very Dangerous rating by allocating 20% of its value to Dangerous-or-worse-rated stocks and 60% held in cash. Making matters worse, it charges investors total annual costs of 5.50%. Why should investors pay such high fees when over half their assets are held in cash? Denny’s Corporation (NASDAQ: DENN ) is one of our least favorite stocks held by Small Cap ETFs and mutual funds and earns our Dangerous rating. Over the last five years, the company’s NOPAT has declined by 7% compounded annually. The company currently earns a 6% ROIC. Despite declining profits, DENN has soared over the past five years and shares are up nearly 250%. This price appreciation has left DENN significantly overvalued. To justify its current price of $11/share, Denny’s must grow NOPAT by 10% compounded annually for the next 15 years . This expectation seems rather optimistic given Denny’s failure to grow profits over the past five years. Figure 2 shows the distribution of our Predictive Ratings for all investment style ETFs and mutual funds. Figure 2: Distribution of ETFs & Mutual Funds (Assets and Count) by Predictive Rating (click to enlarge) Figure 3 offers additional details on the quality of the investment style funds. Note that the average total annual cost of Very Dangerous funds is almost four times that of Very Attractive funds. Figure 3: Predictive Rating Distribution Stats (click to enlarge) * Avg TAC = Weighted Average Total Annual Costs This table shows that only the best of the best funds get our Very Attractive Rating: they must hold good stocks AND have low costs. Investors deserve to have the best of both and we are here to give it to them. Ratings by Investment Style Figure 4 presents a mapping of Very Attractive funds by investment style. The chart shows the number of Very Attractive funds in each investment style and the percentage of assets in each style allocated to funds that are rated Very Attractive. Figure 4: Very Attractive ETFs & Mutual Funds by Investment Style (click to enlarge) Figure 5 presents the data charted in Figure 4 Figure 5: Very Attractive ETFs & Mutual Funds by Investment Style (click to enlarge) Figure 6 presents a mapping of Attractive funds by investment style. The chart shows the number of Attractive funds in each style and the percentage of assets allocated to Attractive-rated funds in each style. Figure 6: Attractive ETFs & Mutual Funds by Investment Style (click to enlarge) Figure 7 presents the data charted in Figure 6. Figure 7: Attractive ETFs & Mutual Funds by Investment Style (click to enlarge) Figure 8 presents a mapping of Neutral funds by investment style. The chart shows the number of Neutral funds in each investment style and the percentage of assets allocated to Neutral-rated funds in each style. Figure 8: Neutral ETFs & Mutual Funds by Investment Style (click to enlarge) Figure 9 presents the data charted in Figure 8. Figure 9: Neutral ETFs & Mutual Funds by Investment Style (click to enlarge) Figure 10 presents a mapping of Dangerous funds by fund style. The chart shows the number of Dangerous funds in each investment style and the percentage of assets allocated to Dangerous-rated funds in each style. The landscape of style ETFs and mutual funds is littered with Dangerous funds. Investors in Small Cap Blend funds have put over 57% of their assets in Dangerous-rated funds. Figure 10: Dangerous ETFs & Mutual Funds by Investment Style (click to enlarge) Figure 11 presents the data charted in Figure 10. Figure 11: Dangerous ETFs & Mutual Funds by Investment Style (click to enlarge) Figure 12 presents a mapping of Very Dangerous funds by fund style. The chart shows the number of Very Dangerous funds in each investment style and the percentage of assets in each style allocated to funds that are rated Very Dangerous. Figure 12: Very Dangerous ETFs & Mutual Funds by Investment Style (click to enlarge) Figure 13 presents the data charted in Figure 12. Figure 13: Very Dangerous ETFs & Mutual Funds by Investment Style (click to enlarge) Source Figures 1-13: New Constructs, LLC and company filings D isclosure: David Trainer and Thaxston McKee receive no compensation to write about any specific stock, sector or theme.

Best And Worst: Mid Cap Blend ETFs, Mutual Funds And Key Holdings

Summary Mid Cap Blend style ranks ninth in 2Q15. Based on an aggregation of ratings of 19 ETFs and 328 mutual funds. CZA is our top rated Mid Cap Blend ETF and TMPIX is our top rated Mid Cap Blend mutual fund. The Mid Cap Blend style ranks ninth out of the 12 fund styles as detailed in our 2Q15 Style Ratings report . It gets our Dangerous rating, which is based on an aggregation of ratings of 19 ETFs and 328 mutual funds in the Mid Cap Blend style. Figures 1 and 2 show the five best and worst rated ETFs and mutual funds in the style. Not all Mid Cap Blend style ETFs and mutual funds are created the same. The number of holdings varies widely (from 25 to 3264). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Mid 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. Validea Market Legends (NASDAQ: VALX ) and ProShares S&P MidCap 400 Dividend (NYSEARCA: REGL ) 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. Johnson Mutual Funds Opportunity Fund (MUTF: JOPPX ) is excluded from Figure 2 because its total net assets are below $100 million and do not meet our liquidity minimums. Guggenheim Mid-Cap Core (NYSEARCA: CZA ) is our top-rated Mid Cap Blend ETF and Touchstone Mid Cap Fund (MUTF: TMPIX ) is our top-rated Mid Cap Blend mutual fund. CZA earns our Attractive rating and TMPIX earns our Very Attractive rating. The Progressive Corp. (NYSE: PGR ) is one of our favorite holdings of Mid Cap Blend ETFs and mutual funds, despite being a large cap stock. Progressive earns our Attractive rating. Since 1998, Progressive has grown after-tax profit ( NOPAT ) by a steady 7% compounded annually. Progressive also boasts a top-quintile return on invested capital ( ROIC ) of 22%. The company counts rising economic earnings and strong free cash flow among its many other strong points. At ~$28/share, PGR trades at a price to economic book ( PEBV ) ratio of only 0.9. This valuation implies that Progressive’s NOPAT will permanently decline by 1c0% from current levels. However, if Progressive can grow NOPAT by just 5% compounded annually for the next five years , the stock is worth $41/share today — a 46% upside. Russell Small Cap Completeness ETF (NYSEARCA: RSCO ) is our worst rated Mid Cap Blend ETF and Saratoga Advantage Mid Cap Portfolio (MUTF: SPMAX ) is our worst rated Mid Cap Blend mutual fund. RSCO earns our Dangerous rating and SPMAX earns our Very Dangerous rating. One of the worst stocks held by Mid Cap Blend ETFs and mutual funds despite being a small cap stock, is Black Diamond Inc. (NASDAQ: BDE ). Black Diamond earns our Very Dangerous rating. In 2014 the company earned a negative NOPAT of $4 million, the company’s worst single year in our model. This negative NOPAT is particularly alarming since it represents the third consecutive year of declining NOPAT. Compounding this issue is Black Diamond’s value destroying -2% ROIC. Black Diamond’s economic earnings have also been negative for five consecutive years. Despite the poor financial state of the company, the stock has risen to unwarranted values and is now awfully overvalued. To justify its current price of ~$10/share, Black Diamond would need to achieve positive NOPAT margins (-2% in 2014) and grow revenue by 29% compounded annually for the next 16 years . With revenue growth below these expectations and actually declining in 2014, there remains significant downside risk in BDE shares. Figures 3 and 4 show the rating landscape of all Mid Cap Blend ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst ETFs (click to enlarge) Figure 4: Separating the Best Mutual Funds From the Worst Funds (click to enlarge) Sources Figures 1-4: New Constructs, LLC and company filings Disclosure: David Trainer owns PGR. David Trainer and Allen L. Jackson receive no compensation to write about any specific stock, style, style or theme. Disclosure: I am/we are long PGR. (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.

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

Summary Large Cap Value style ranks first in Q2’15. Based on an aggregation of ratings of 42 ETFs and 920 mutual funds. SCHD is our top rated Large Cap Value ETF and CDOYX is our top rated Large Cap Value mutual fund. The Large Cap Value style ranks first out of the 12 fund styles as detailed in our Q2’15 Style Ratings report. It gets our Attractive rating, which is based on aggregation of ratings of 42 ETFs and 920 mutual funds in the Large Cap Value style. 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 15 to 1003). 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. The iShares Enhanced U.S. Large Cap ETF (NYSEARCA: IELG ) and The First Trust NASDAQ Rising Dividend Achievement ETF (NASDAQ: RDVY ) are excluded from Figure 1 because their total net assets are less than $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. The Schwab U.S. Dividend Equity ETF (NYSEARCA: SCHD ) is our top-rated Large Cap Value ETF and the Columbia Funds Dividend Opportunity Fund (MUTF: CDOYX ) is our top-rated Large Cap Value Mutual Fund. Both earn our Very Attractive rating. One of our favorite stocks held by Large Cap Value funds is Travelers Companies (NYSE: TRV ). Since 2008, Travelers has grown after tax profit ( NOPAT ) by 5% compounded annually. More recently, the company has ramped up its NOPAT growth, growing profits by 51% compounded annually since 2011. The company currently has a 12% return on invested capital ( ROIC ), over $3.4 billion in free cash flow on a trailing 12-month basis, and positive economic earnings for eight of the past 10 years. However, at its current price of ~$101/share, Travelers is significantly undervalued, with a price to economic book value ( PEBV ) ratio of 0.6. This ratio implies the market expects Travelers’ profits to permanently decline by 40% from current levels, despite the fact that the most recent results show Travelers doing the exact opposite, growing profits by over 50%. If Travelers can grow NOPAT by just 5% compounded annually for the next seven years , the stock is worth $200/share today – a 98% upside. The Columbia American Beacon Large Cap Value ETF (NYSEARCA: GVT ) is our worst rated Large Cap Value ETF and the Good Harbor Tactical Equity Income Fund (MUTF: GHTAX ) is our worst rated Large Cap Value mutual fund. GVT earns our Neutral rating and GHTAX earns our Very Dangerous rating. One of the worst stocks held by Large Cap Value funds is Williams Companies (NYSE: WMB ). Since 2011, the company has been troubled by its inability to create shareholder value. During the past six years, ROIC at the company has never exceeded 7%. Over this same time period, Williams’ ROIC was less than the cost of deploying the capital in its core business operations, resulting in the company producing negative economic earnings since 2009. NOPAT over the last four years has been equally disappointing. In 2011 Williams’ NOPAT was $1.7 billion. Every year since, NOPAT has declined by a compounded annual rate of 13% to just $1.4 billion in 2014. WMB’s stock price does not reflect the deteriorating and value-destroying nature of its fundamental business operations. Since 2011, WMB’s stock price has increased by 33%. But to justify its current price of $48/share the company would need to grow NOPAT by 16% for the next 14 years . This seems very optimistic given that the company’s historical NOPAT growth over the past decade has been only 3%. 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 ETFs (click to enlarge) Figure 4: Separating the Best Mutual Funds From the Worst Funds (click to enlarge) Sources Figures 1-4: New Constructs, LLC and company filings D isclosure: David Trainer owns TRV. David Trainer and Allen L. Jackson receive no compensation to write about any specific stock, style, style or theme. Disclosure: I am/we are long TRV. (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.