How To Find The Best Style ETFs 3Q16 by Kyle Martone
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?
Best Style ETFs – Don’t Trust ETF Labels
Michael Mauboussin Tips From Great Investors [Pt.2]
This is the second part of a short series on Michael J. Mauboussin's research document reflecting on 30 years of Wall Street analysis published in 2016. Q3 2020 hedge fund letters, conferences and more The document outlined Mauboussin's observations of successful investors throughout his three decades on the Street. This article starts at point six. Read More
There are at least 74 different All Cap Blend ETFs and at least 289 ETFs across twelve styles. Do investors need 24+ choices on average per style? How different can the ETFs be?
Those 74 All Cap Blend ETFs are very different. With anywhere from 22 to 3,625 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 Blend funds rank first for stock selection. Small Cap Value funds rank last. Details on the Best & Worst ETFs in each style are here.
Best Style ETFs – A Recipe for Paralysis By Analysis
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 3,625 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 style.
Figure 1: The Best ETF in Each Style
Sources: New Constructs, LLC and company filings
Best Style ETFs
Amongst the ETFs in Figure 1, WeatherStorm Forensic Accounting Long-Short (FLAG) ranks first overall, iShares Edge MSCI USA Quality Factor (QUAL) ranks second, and Validea Market Legends (VALX) ranks third. State Street SPDR S&P 600 Small Cap Growth (SLYG) ranks last.
Best Style ETFs – 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
Best Style ETFs – 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.
WeatherStorm Forensic Accounting Long-Short ETF (FLAG) is not only the top-rated All Cap Value ETF, but it is also the overall best ETF out of the 289 style ETFs that we cover.
The ETFs in Figure 1 all receive an Attractive-or-better rating. However, with so few assets in some of the funds, it is clear investors haven’t identified these quality ETFs.
This article originally published here on August 9, 2016.
Disclosure: David Trainer and Kyle Martone receive no compensation to write about any specific stock, style, or theme.