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 83 different All Cap Blend ETFs and at least 293 ETFs across twelve styles. Do investors need 24+ choices on average per style? How different can the ETFs be?
Those 83 All Cap Blend ETFs are very different. With anywhere from 21 to 3,682 holdings, many of the 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 ranks first for stock selection. Small Cap Value ranks last. Details on the Best & Worst ETFs in each style are here.
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 3,682 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
Best Style ETFs
Amongst the ETFs in Figure 1, PowerShares S&P 500 Low Volatility Portfolio (SPLV) ranks first overall, First Trust Morningstar Dividend Leaders Index (FDL) ranks second, and PowerShares S&P 500 Downside Hedged Portfolio (PHDG) ranks third. Vanguard Small Cap Growth Index (VBK) 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 our 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
PowerShares S&P 500 Low Volatility Portfolio (SPLV) is not only the top-rated All Cap Blend ETF, but is also the overall best style ETF out of the 293 style ETFs that we cover.
The worst ETF in Figure 1 is Vanguard Small Cap Growth Index (VBK), which gets a Neutral rating. One would think ETF providers could do better for this style.
This article originally published here on February 9, 2017.
Disclosure: David Trainer, Kyle Guske II, and Kyle Martone receive no compensation to write about any specific stock, style, or theme.
Article by Kyle Martone, New Constructs