Best And Worst Q4’15: Financials ETFs, Mutual Funds And Key Holdings
Summary The Financials sector ranks sixth in Q4’15. Based on an aggregation of ratings of 43 ETFs and 220 mutual funds. IYF is our top-rated Financials sector ETF and DVFYX is our top-rated Financials sector mutual fund. The Financials sector ranks sixth out of the 10 sectors as detailed in our Q4’15 Sector Ratings for ETFs and Mutual Funds report. Last quarter , the Financial Sector ranked 9th. It gets our Neutral rating, which is based on aggregation of ratings of 43 ETFs and 220 mutual funds in the Financials sector. See a recap of our Q3’15 Sector Ratings here . Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the sector. Not all Financials sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 24 to 563). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Financials sector 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 PowerShares KBW Property & Casualty Insurance Portfolio ETF (NYSEARCA: KBWP ) 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 Schwab Financial Services Fund (MUTF: SWFFX ) is excluded from Figure 2 because its total net assets (TNA) are below $100 million and do not meet our liquidity minimums. The iShares U.S. Financials ETF (NYSEARCA: IYF ) is the top-rated Financials ETF and the Davis Financial Fund (MUTF: DVFYX ) is the top-rated Financials mutual fund. IYF earns a Very Attractive rating and DVFYX earns an Attractive rating. The PowerShares KBW Premium Yield Equity REIT Portfolio ETF (NYSEARCA: KBWY ) is the worst-rated Financials ETF and the Rydex Real Estate Fund (MUTF: RYREX ) is the worst-rated Financials mutual fund. Both earn a Very Dangerous rating. Discover Financial Services (NYSE: DFS ) is one of our favorite stocks held by Financials ETFs and mutual funds and earns our Very Attractive rating. Since 2011, Discover has grown after-tax profit ( NOPAT ) by an impressive 34% compounded annually. Over the same time frame, the company has increased its return on invested capital ( ROIC ) to a top quintile 18% up from 10%. Despite improving profitability, DFS is down 16% year-to-date and now presents value investors a great buying opportunity. At its current price of $57/share, Discover has a price to economic book value ( PEBV ) ratio of 0.9. This ratio implies that the market expects Discover’s profits to permanently decline by 10%. If Discover can grow NOPAT by just 4% compounded annually over the next five years , the stock is worth $74/share today – a 30% upside. PHH Corporation (NYSE: PHH ) is one of our least favorite stocks held by Financials ETFs and mutual funds and is on October’s Most Dangerous Stocks list . PHH earns our Very Dangerous rating. PHH has been wildly inconsistent at generating positive GAAP net income, but one thing that has been consistent is PHH’s inability to generate economic earnings . Additionally, PHH earns a bottom quintile ROIC of -18% which is well below the 12% earned in 2013. It appears investors realized the trouble at PHH as shares crashed over 30% after poor Q2’15 earnings. However, what investors may not realize is how overvalued PHH remains. To justify its current price of $14/share, PHH must immediately achieve pre-tax margins of 2% (average of last five years, excluding the -44% in 2014) and grow revenues by 12% compounded annually for the next 12 years . Figures 3 and 4 show the rating landscape of all Financials 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 D isclosure: David Trainer and Thaxston McKee receive no compensation to write about any specific stock, sector or theme.