How To Find The Best Sector ETFs 3Q16 by Kyle Guske II
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
Charlie Munger: Invert And Use “Disconfirming Evidence”
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?
Those 38 Financials ETFs are very different. With anywhere from 24 to 573 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 rank first for stock selection. Utilities 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 573 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
Best Sector ETFs 3Q16
Amongst the ETFs in Figure 1, State Street Consumer Staples Select Sector SPDR (XLP) ranks first overall, PowerShares Dynamic Networking Portfolio (PXQ) ranks second, and ETF Series Solutions: U.S. Global Jets (JETS) ranks third. Fidelity MSCI Utilities Index (FUTY) 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
State Street Consumer Staples Select Sector SPDR (XLP) is not only the top-rated Consumer Staples ETF, but is also the overall best sector ETF out of the 178 sector ETFs that we cover.
The worst ETF in Figure 1 is Fidelity MSCI Utilities Index (FUTY), which gets a Dangerous rating. One would think ETF providers could do better for this sector.
This article originally published here on August 8, 2016.
Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, sector, or theme.