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Best And Worst Q4’15: Consumer Staples ETFs, Mutual Funds And Key Holdings

Summary The Consumer Staples sector ranks first in Q4’15. Based on an aggregation of ratings of 10 ETFs and 8 mutual funds.. FSTA is our top-rated Consumer Staples ETF and VCSAX is our top-rated Consumer Staples mutual fund.. The Consumer Staples sector ranks first out of the 10 sectors as detailed in our Q4’15 Sector Ratings for ETFs and Mutual Funds report. It gets our Attractive rating, which is based on aggregation of ratings of 10 ETFs and eight mutual funds in the Consumer Staples sector. See a recap of our Q3’15 Sector Ratings here . Figure 1 ranks from best to worst the nine Consumer Staples ETFs that meet our liquidity standards and Figure 2 ranks from best to worst all eight Consumer Staples mutual funds. Not all Consumer Staples sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 16 to 114). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Consumer Staples sector should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2. It is rare that two of the worst ETFs in this sector hold enough quality stocks to earn an Attractive-or-better rating. 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 The ProShares Ultra Consumer Goods ETF (NYSEARCA: UGE ) is excluded from Figure 1 because its 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 Fidelity MSCI Consumer Staples Index ETF (NYSEARCA: FSTA ) is the top-rated Consumer Staples ETF and the Vanguard World Funds: Consumer Staples Index (MUTF: VCSAX ) is the top-rated Consumer Staples mutual fund. FSTA earns a Very Attractive rating and VCSAX earns an Attractive rating. The PowerShares S&P SmallCap Consumer Staples Portfolio ETF (NASDAQ: PSCC ) is the worst-rated Consumer Staples ETF and the ICON Consumer Staples Fund (MUTF: ICRAX ) is the worst-rated Consumer Staples mutual fund. PSCC earns a Neutral rating and ICRAX earns a Very Dangerous rating 112 stocks of the 3000+ we cover are classified as Consumer Staples stocks. Cal-Maine Foods (NASDAQ: CALM ) is one of our favorite stocks held by Consumer Staples ETFs and mutual funds and was previously a Stock Pick of the Week . It earns a Very Attractive rating. Since 1998, Cal-Maine has grown after-tax profit ( NOPAT ) by an impressive 20% compounded annually. Over this same timeframe, Cal-Maine’s return on invested capital ( ROIC ) has improved from 5% to its current top quintile 45%. Despite nearly two decades of excellent business operations, CALM is priced for significant profit decline. At its current price of $61/share, CALM has a price to economic book value ( PEBV ) ratio of 0.7. This ratio implies that the market expects the company’s profits to permanently decline by 30%. If Cal-Maine can grow NOPAT by just 8% compounded annually over the next decade , the stock is worth $76/share today – a 25% upside. Seneca Foods Corp (NASDAQ: SENEA ) is one of our least favorite stocks held by Consumer Staples ETFs and mutual funds and earns a Dangerous rating. Since 2012, the company has been unable to grow profits, as NOPAT has declined by 25% compounded annually. Making matters worse, Seneca’s ROIC fell to a bottom quintile -2% from 8% over this same timeframe. Despite the deteriorating business fundamentals, SENEA remains priced for significant profit growth moving forward. To justify its current price of $26/share, Seneca must grow NOPAT by 11% compounded annually for the next 20 years . Investors would be wise to stay away from overvalued stocks like SENEA. Figures 3 and 4 show the rating landscape of all Consumer Staples ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst ETFs (click to enlarge) Sources: New Constructs, LLC and company filings Figure 4: Separating the Best Mutual Funds From the Worst Mutual Funds (click to enlarge) Sources: New Constructs, LLC and company filings Disclosure: David Trainer and Blaine Skaggs receive no compensation to write about any specific stock, sector or theme.

How To Find The Best Style ETFs: Q3’15

Summary The large number of ETFs hurts investors more than it helps as too many options become paralyzing. Performance of an ETFs holdings are equal to the performance of an ETF. Our coverage of ETFs leverages the diligence we do on each stock by rating ETFs based on the aggregated ratings of their holdings. Finding the best ETFs is an increasingly difficult task in a world with so many to choose from. How can you pick with so many choices available? Don’t Trust ETF Labels There are at least 67 different All Cap Blend ETFs and at least 281 ETFs across twelve styles. Do investors need 23+ choices on average per style? How different can the ETFs be? Those 67 All Cap Blend ETFs are very different. With anywhere from 4 to 3794 holdings, many of these All Cap Blend ETFs have drastically different portfolios, creating drastically different investment implications. The same is true for the ETFs in any other style, as each offers a very different mix of good and bad stocks. Large Cap Value ranks first for stock selection. Small Cap Blend ranks last. Details on the Best & Worst ETFs in each style are here . A Recipe for Paralysis By Analysis We firmly believe ETFs for a given style should not all be that different. We think the large number of All Cap Blend (or any other) style ETFs hurts investors more than it helps because too many options can be paralyzing. It is simply not possible for the majority of investors to properly assess the quality of so many ETFs. Analyzing ETFs, done with the proper diligence, is far more difficult than analyzing stocks because it means analyzing all the stocks within each ETF. As stated above, that can be as many as 3794 stocks, and sometimes even more, for one ETF. Any investor worth his salt recognizes that analyzing the holdings of an ETF is critical to finding the best ETF. Figure 1 shows our top rated ETF for each style. Note that there are no ETFs currently under coverage in the All Cap Growth or All Cap Value styles. Figure 1: The Best ETF in Each Style (click to enlarge) Sources: New Constructs, LLC and company filings How to Avoid “The Danger Within” Why do you need to know the holdings of ETFs before you buy? You need to be sure you do not buy an ETF that might blow up. Buying an ETF without analyzing its holdings is like buying a stock without analyzing its business and finances. No matter how cheap, if it holds bad stocks, the ETF’s performance will be bad. Don’t just take my word for it, see what Barron’s says on this matter. PERFORMANCE OF ETF’S HOLDINGS = PERFORMANCE OF ETF If Only Investors Could Find Funds Rated by Their Holdings The Arrow QVM Equity Factor (NYSEARCA: QVM ) is the top-rated Large Cap Blend ETF and the overall best ETF of the 281 style ETFs that we cover. The worst ETF in Figure 1 is the State Street SPDR S&P 600 Small Cap Growth (NYSEARCA: SLYG ), which gets a Neutral rating. One would think ETF providers could do better for this style. Disclosure: David Trainer and Max Lee 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. (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.

How To Avoid The Worst Sector Mutual Funds: Q3’15

Summary The large number of mutual funds has little to do with serving your best interests. Below are three red flags you can use to avoid the worst mutual funds. The following presents the least and most expensive sector mutual funds as well as the worst overall sector mutual funds per our Q3’15 sector ratings. Question: Why are there so many mutual funds? Answer: mutual fund providers tend to make lots of money on each fund so they create more products to sell. The large number of mutual funds has little to do with serving your best interests. Below are three red flags you can use to avoid the worst mutual funds: Inadequate Liquidity This issue is the easiest to avoid, and our advice is simple. Avoid all mutual funds with less than $100 million in assets. Low levels of liquidity can lead to a discrepancy between the price of the mutual fund and the underlying value of the securities it holds. Plus, low asset levels tend to mean lower volume in the mutual fund and larger bid-ask spreads. High Fees Mutual funds should be cheap, but not all of them are. The first step here is to know what is cheap and expensive. To ensure you are paying at or below average fees, invest only in mutual funds with total annual costs below 2.37%, which is the average total annual cost of the 632 U.S. equity sector mutual funds we cover. Figure 1 shows the most and least expensive sector mutual funds. Rydex provides three of the most expensive mutual funds while Vanguard mutual funds are among the cheapest. Figure 1: 5 Least and Most Expensive Sector Mutual Funds (click to enlarge) Sources: New Constructs, LLC and company filings Investors need not pay high fees for quality holdings. The Fidelity Select Consumer Staples Portfolio (MUTF: FDFAX ) earns our Very Attractive rating and has low total annual costs of only 0.94%. On the other hand, the Vanguard Specialized Funds REIT Index (MUTF: VGSNX ) holds poor stocks. No matter how cheap a mutual fund, if it holds bad stocks, its performance will be bad. The quality of a mutual fund’s holdings matters more than its price. Poor Holdings Avoiding poor holdings is by far the hardest part of avoiding bad mutual funds, but it is also the most important because a mutual fund’s performance is determined more by its holdings than its costs. Figure 2 shows the mutual funds within each sector with the worst holdings or portfolio management ratings . Figure 2: Sector Mutual Funds with the Worst Holdings (click to enlarge) Sources: New Constructs, LLC and company filings Fidelity appears more often than any other providers in Figure 2, which means that they offer the most mutual funds with the worst holdings. Our overall ratings on mutual funds are based primarily on our stock ratings of their holdings. The Danger Within Buying a mutual fund without analyzing its holdings is like buying a stock without analyzing its business and finances. Put another way, research on mutual fund holdings is necessary due diligence because a mutual fund’s performance is only as good as its holdings’ performance. PERFORMANCE OF MUTUAL FUND’S HOLDINGS = PERFORMANCE OF MUTUAL FUND Disclosure: David Trainer and Max Lee receive no compensation to write about any specific stock, sector, 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.