Tag Archives: david trainer

How To Find The Best Sector ETFs: Q4’15

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 44 different Financials ETFs and at least 196 ETFs across all sectors. Do investors need 19+ choices on average per sector? How different can the ETFs be? Those Financials ETFs are very different. With anywhere from 24 to 561 holdings, many of these Financials ETFs have drastically different portfolios, creating drastically different investment implications. The same is true for the ETFs in any other sector, as each offers a very different mix of good and bad stocks. Consumer Staples ranks first for stock selection. Energy ranks last. Details on the Best & Worst ETFs in each sector are here . A Recipe for Paralysis By Analysis We firmly believe ETFs for a given sector should not all be that different. We think the large number of Financials (or any other) sector 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 561 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 sector. Figure 1: The Best ETF in Each Sector (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 PowerShares KBW Property & Casualty Insurance Portfolio ETF (NYSEARCA: KBWP ) is the top-rated Financials ETF and the overall best ETF of the 196 sector ETFs that we cover. The worst ETF in Figure 1 is the Fidelity Covington MSCI Utilities Index (NYSEARCA: FUTY ), which gets a Dangerous rating. One would think ETF providers could do better for this sector. Disclosure: David Trainer and Blaine Skaggs receive no compensation to write about any specific stock, sector, or theme.

Cheap Funds Dupe Investors – Q4 2015

Summary Comparison of AUM in funds with attractive holdings versus attractive costs. Distribution of ETFs and mutual funds by Predictive Rating and our two component ratings. Commentary on the shortcomings of traditional ETF and mutual fund research. Fund holdings affect fund performance more than fees or past performance. A cheap fund is not necessarily a good fund. A fund that has done well in the past is not likely to do well in the future ( e.g. 5-star kiss of death and active management has long history of underperformance ). Yet, traditional fund research focuses only on low fees and past performance. Our research on holdings enables investors to find funds with high quality holdings – AND – low fees. Investors are good at picking cheap funds. We want them to be better at picking funds with good stocks. Both are required to maximize success. We make this easy with our predictive fund ratings. A fund’s predictive rating is based on its holdings, its total costs, and how it ranks when compared to the rest of the 6700+ ETFs and mutual funds we cover. Figure 1 shows that 69% of fund assets are in ETFs and mutual funds with low costs but only 1% of assets are in ETFs and mutual funds with Attractive holdings. This discrepancy is astounding. Figure 1: Allocation of Fund Assets By Holdings Quality and By Costs Sources: New Constructs, LLC and company filings Two key shortcomings in the ETF and mutual fund industry cause this large discrepancy: A lack of research into the quality of holdings. A lack of high-quality holdings or good stocks. With about twice as many funds as stocks in the market, there simply are not enough good stocks to fill all the funds. These shortcomings are related. If investors had more insight into the quality of funds’ holdings, I think they would allocate a lot less money to funds with poor quality holdings. Many funds would cease to exist. Investors deserve research on the quality of stocks held by ETFs and mutual funds. Quality of holdings is the single most important factor in determining an ETF or mutual fund’s future performance. No matter how low the costs, if the ETF or mutual fund holds bad stocks, performance will be poor. Costs are easier to find but research on the quality of holdings is almost non-existent. Figure 2 shows investors are not putting enough money into ETFs and mutual funds with high-quality holdings. Only 94 out of 6706 (1% of assets) ETFs and mutual funds allocate a significant amount of value to quality holdings. 99% of assets are in funds that do not justify their costs and over charge investors for poor portfolio management. Figure 2: Distribution of ETFs & Mutual Funds (Count & Assets) By Portfolio Management Rating (click to enlarge) Source: New Constructs, LLC and company filings Figure 3 shows that investors successfully find low-cost funds. 69% of assets are held in ETFs and mutual funds that have Attractive-or-better rated total annual costs , our apples-to-apples measure of the all-in cost of investing in any given fund. Out of the 6706 ETFs and mutual funds we cover, 1524 (69% of assets) earn an Attractive-or-better Total Annual Costs rating. Clearly, ETF and mutual fund investors are smart shoppers when it comes to finding cheap investments. But cheap is not necessarily good. The PowerShares S&P SmallCap Utilities Portfolio ETF (NASDAQ: PSCU ) gets an overall predictive rating of Very Dangerous because no matter how low its fees (0.32%), we expect it to underperform because it holds too many Dangerous-or-worse rated stocks. Low fees cannot boost fund performance. Only good stocks can boost performance. Figure 3: Distribution of ETFs & Mutual Funds (Count & Assets) By Total Annual Costs Ratings (click to enlarge) Source: New Constructs, LLC and company filings Investors should allocate their capital to funds with both high-quality holdings and low costs because those are the funds that offer investors the best performance potential. But they do not. Not even close. Figure 4 shows that less than half (49%) of ETF and mutual fund assets are allocated to funds with low costs and high-quality holdings according to our Predictive Fund Ratings, which are based on the quality of holdings and the all-in costs to investors. Figure 4: Distribution of ETFs & Mutual Funds (Count & Assets) By Predictive Ratings (click to enlarge) Source: New Constructs, LLC and company filings Investors deserve forward-looking ETF and mutual fund research that assesses both costs and quality of holdings. For example, the PowerShares KBW Property & Casualty Insurance Portfolio ETF (NYSEARCA: KBWP ) has both low costs and quality holdings. Why is the most popular fund rating system based on backward-looking past performance? We do not know, but we do know that the transparency into the quality of portfolio management provides cover for the ETF and mutual fund industry to continue to over charge investors for poor portfolio management. How else could they get away with selling so many Dangerous-or-worse rated ETFs and mutual funds? John Bogle is correct – investors should not pay high fees for active portfolio management. His index funds have provided investors with many low-cost alternatives to actively managed funds. However, by focusing entirely on costs, he overlooks the primary driver of fund performance: the stocks held by funds. Investors also need to beware certain Index Label Myths . Research on the quality of portfolio management of funds empowers investors to make better investment decisions. Investors should no longer pay for poor portfolio management. Disclosure: David Trainer and Blaine Skaggs receive no compensation to write about any specific stock, sector or theme.

Best And Worst Q4’15: Small Cap Value ETFs, Mutual Funds And Key Holdings

Summary The Small Cap Value style ranks tenth in Q4’15. . Based on an aggregation of ratings of 16 ETFs and 255 mutual funds. . VBR is our top-rated Small Cap Value style ETF and RVFIX is our top-rated Small Cap Value Style mutual fund.. The Small Cap Value style ranks tenth out of the twelve fund styles as detailed in our Q4’15 Style Ratings for ETFs and Mutual Funds report. Last quarter , the Small Cap Value style ranked tenth as well. It gets our Dangerous rating, which is based on an aggregation of ratings of 16 ETFs and 255 mutual funds in the Small Cap Value style. See a recap of our Q3’15 Style Ratings here. Figure 1 ranks from best to worst the ten Small-Cap Value ETFs that meet our liquidity standards and Figure 2 shows the five best and worst-rated Small-Cap Value mutual funds. Not all Small Cap Value style ETFs and mutual funds are created the same. The number of holdings varies widely (from 12 to 1502). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Small 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 The Direxion Value Line Small- and Mid-Cap High Dividend ETF (NYSEARCA: VLSM ) and the First Trust Mid Cap Value AlphaDEX ETF (NYSEARCA: FNK ) and 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 Vanguard Small-Cap Value ETF (NYSEARCA: VBR ) is the top-rated Small Cap Value ETF and the Royce Small-Cap Value Fund (MUTF: RVFIX ) is the top-rated Small Cap Value mutual fund. DBR earns a Neutral rating and RVFIX earns an Attractive rating. The PowerShares Fundamental Pure Small Value Portfolio ETF (NYSEARCA: PXSV ) is the worst-rated Small Cap Value ETF and the Aston/River Road Independent Value Fund (MUTF: ARIVX ) is the worst-rated Small Cap Value mutual fund. PXSV earns a Dangerous rating and ARIVX earns a Very Dangerous rating. The Buckle, Inc. (NYSE: BKE ) is one of our favorite stocks held by Small Cap Value ETFs and mutual funds and earns our Very Attractive rating. For the past decade, the company has grown after-tax profit ( NOPAT ) by 13% compounded annually. Not only has the company posted strong profit growth, but Buckle has improved its return on invested capital ( ROIC ) from 18% to a top quintile 30% during the same time frame. Concerns over the retail industry have led shares of this fundamentally sound company to be significantly undervalued. At its current price of $32/share, Buckle has a price to economic book value ( PEBV ) ratio of 0.6. This ratio means that the market expects Buckle’s NOPAT to permanently decline by 40%. If Buckle can grow NOPAT by 5% compounded annually for the next five years , the company is worth $69/share today – a 115% upside. Dean Foods (NYSE: DF ) is one of our least favorite stocks held by Small Cap Value ETFs and mutual funds and earns our Dangerous rating. Dean Foods was also placed in the Danger Zone back in December 2012. Since 2010, Dean Foods’ NOPAT has declined by an alarming 48% compounded annually. The company’s ROIC has fallen from 4% in 2010 to a bottom quintile 1% on a trailing-twelve-month basis. Despite the deterioration of business operations, Dean Foods remains priced for significant profit growth. To justify its current price of $19/share, Dean Foods must grow NOPAT by 19% compounded annually for the next 17 years . This expectation seems optimistic given that Dean Foods’ profits have steadily declined since 2010. Figures 3 and 4 show the rating landscape of all Small Cap Value 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 Funds (click to enlarge) Sources: New Constructs, LLC and company filings D isclosure: David Trainer and Thaxston McKee receive no compensation to write about any specific stock, style, or theme.