How To Find The Best Sector ETFs 2Q16 by Kyle Guske II – New Constructs
Finding the best sector 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 38 different Financials ETFs and at least 178 ETFs across ten sectors. Do investors need 17+ choices on average per sector? How different can the ETFs be?
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Those 38 Financials ETFs are very different. With anywhere from 24 to 562 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. Industrials rank first for stock selection. Energy ranks last. Details on the Best & Worst ETFs in each sector are here.
Paralysis By Analysis
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 562 stocks, and sometimes even more, for one ETF.
Any investor focused on fulfilling fiduciary duties 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
Sources: New Constructs, LLC and company filings
Amongst the ETFs in Figure 1, U.S. Global Jets ETF (JETS) ranks first overall, iShares U.S. Financial Services ETF (IYG) ranks second, and iShares U.S. Consumer Goods ETF (IYK) ranks third. First Trust Utilities AlphaDEX Fund (FXU) ranks last.
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 FUND’S HOLDINGS = PERFORMANCE OF FUND
If Only Investors Could Find Funds Rated by Their Holdings
Our ETF ratings leverage our stock coverage. We rate ETFs based on the aggregated ratings of the stocks each ETF holds.
U.S. Global Jets ETF (JETS) is the top-rated Industrials ETF and the overall best ETF of the 178 sector ETFs that we cover.
The worst ETF in Figure 1 is First Trust Utilities AlphaDEX Fund (FXU), which gets a Dangerous rating. One would think ETF providers could do better for this sector.
Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, sector, or theme.