4Q16 Style Ratings For ETFs & Mutual Funds

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At the beginning of the fourth quarter of 2016, only the Large Cap Blend and All Cap Blend styles earn an Attractive-or-better rating. Our style ratings are based on the aggregation of our fund ratings for every ETF and mutual fund in each style. See last quarter’s Style Ratings here.

Investors looking for style funds that hold quality stocks should look no further than the Large Cap Blend and All Cap Blend styles. These sectors house the highest rated funds. Figures 4 through 7 provide more details. The primary driver behind an Attractive fund rating is good portfolio management, or good stock picking, with low total annual costs.

Attractive-or-better ratings do not always correlate with Attractive-or-better total annual costs. This fact underscores that (1) cheap funds can dupe investors and (2) investors should invest only in funds with good stocks and low fees.

See Figures 4 through 13 for a detailed breakdown of ratings distributions by investment style. See our ETF & mutual fund screener for rankings, ratings and reports on 7000+ mutual funds and 400+ ETFs. Our fund rating methodology is detailed here.

All of our reports on the best & worst ETFs and mutual funds in every investment style are available here.

Figure 1: Ratings For All Investment Styles

NewConstructs_StyleRatings4Q16

Source: New Constructs, LLC and company filings

To earn an Attractive-or-better Predictive Rating, an ETF or mutual fund must have high-quality holdings and low costs. Only the top 30% of all ETFs and mutual funds earn our Attractive or better rating.

Nuveen Concentrated Core Fund (NCARX) is the top rated Large Cap Blend fund. It gets our Very Attractive rating by allocating over 52% of its value to Attractive-or-better-rated stocks.

Southwest Airlines Company (LUV $42/share) is one of our favorite stocks held by NCARX and earns a Very Attractive rating. Southwest was a featured Long Idea in July, is on October’s Most Attractive Stocks list, and also on October’s Executive Compensation Aligned with ROIC model portfolio. Over the past decade, Southwest has grown after-tax profit (NOPAT) by 17% compounded annually to $2.8 billion in 2015, and to $3 billion over the last twelve months (TTM). Southwest has increased its return on invested capital (ROIC) from 6% in 2005 to a top-quintile 19% TTM. Despite the improving fundamentals, Southwest remains undervalued. At its current price of $42/share, LUV has a price-to-economic book value (PEBV) ratio of 0.8. This ratio means the market expects LUV’s NOPAT to permanently decrease by 20%. If LUV can grow NOPAT by just 4% compounded annually for the next decade, the stock is worth $62/share today – a 48% upside.

Ivy Small Cap Value Fund (IYVIX) is the worst rated Small Cap Value fund. It gets our Very Dangerous rating by allocating over 57% of its value to Dangerous-or-worse-rated stocks. Making matters worse, it charges investors total annual costs of 4.95%.

FormFactor Inc. (FORM $10/share) is one of our least favorite stocks held by style ETFs and mutual funds and earns a Very Dangerous rating. FORM is on October’s Most Dangerous Stocks as well. Over the past decade, FORM’s NOPAT has declined by 10% compounded annually to $4 million in 2015, and declined further, to -$8 million TTM. FORM’s ROIC has declined from 43% in 2006 to a bottom-quintile -2% TTM. Despite the clear deterioration in business operations, FORM remains priced for significant profit growth. To justify its current price of $10/share, FORM must grow NOPAT by 23% compounded annually for the next 16 years. This expectation seems overly optimistic given FORM’s history of declining profits.

Figure 2 shows the distribution of our Predictive Ratings for all investment style ETFs and mutual funds.

Figure 2: Distribution of ETFs & Mutual Funds (Assets and Count) by Predictive Rating

NewConstructs_StyleRatings_Distribution_4Q16

Source: New Constructs, LLC and company filings

Figure 3 offers additional details on the quality of the investment style funds. Note that the average total annual cost of Very Dangerous funds is almost 18 times that of Very Attractive funds.

Figure 3: Predictive Rating Distribution Stats

NewConstructs_StyleRatingsDistributionStats_4Q16

* Avg TAC = Weighted Average Total Annual Costs

Source: New Constructs, LLC and company filings

This table shows that only the best of the best funds get our Very Attractive Rating: they must hold good stocks AND have low costs. Investors deserve to have the best of both and we are here to give it to them.

Ratings by Investment Style

Figure 4 presents a mapping of Very Attractive funds by investment style. The chart shows the number of Very Attractive funds in each investment style and the percentage of assets in each style allocated to funds that are rated Very Attractive.

Figure 4: Very Attractive ETFs & Mutual Funds by Investment Style

NewConstructs_VeryAttractiveStyleRatings_4Q16

Source: New Constructs, LLC and company filings

Figure 5 presents the data charted in Figure 4

Figure 5: Very Attractive ETFs & Mutual Funds by Investment Style

NewConstructs_VeryAttractiveStyleRatingsStats_4Q16

Source: New Constructs, LLC and company filings

Figure 6 presents a mapping of Attractive funds by investment style. The chart shows the number of Attractive funds in each style and the percentage of assets allocated to Attractive-rated funds in each style.

Figure 6: Attractive ETFs & Mutual Funds by Investment Style

NewConstructs_AttractiveStyleRatings_4Q16

Source: New Constructs, LLC and company filings

Figure 7 presents the data charted in Figure 6.

Figure 7: Attractive ETFs & Mutual Funds by Investment Style

NewConstructs_AttractiveStyleRatingsStats_4Q16

Source: New Constructs, LLC and company filings

Figure 8 presents a mapping of Neutral funds by investment style. The chart shows the number of Neutral funds in each investment style and the percentage of assets allocated to Neutral-rated funds in each style.

Figure 8: Neutral ETFs & Mutual Funds by Investment Style

NewConstructs_NeutralStyleRatings_4Q16

Source: New Constructs, LLC and company filings

Figure 9 presents the data charted in Figure 8.

Figure 9: Neutral ETFs & Mutual Funds by Investment Style

NewConstructs_NeutralStyleRatingsStats_4Q16

Source: New Constructs, LLC and company filings

Figure 10 presents a mapping of Dangerous funds by fund style. The chart shows the number of Dangerous funds in each investment style and the percentage of assets allocated to Dangerous-rated funds in each style.

The landscape of style ETFs and mutual funds is littered with Dangerous funds. Investors in Small Cap Value have put over 44% of their assets in Dangerous-rated funds.

Figure 10: Dangerous ETFs & Mutual Funds by Investment Style

NewConstructs_DangerousStyleRatings_4Q16

Source: New Constructs, LLC and company filings

Figure 11 presents the data charted in Figure 10.

Figure 11: Dangerous ETFs & Mutual Funds by Investment Style

NewConstructs_DangerousStyleRatingsStats_4Q16

Source: New Constructs, LLC and company filings

Figure 12 presents a mapping of Very Dangerous funds by fund style. The chart shows the number of Very Dangerous funds in each investment style and the percentage of assets in each style allocated to funds that are rated Very Dangerous.

Figure 12: Very Dangerous ETFs & Mutual Funds by Investment Style

NewConstructs_VeryDangerousStyleRatings_4Q16

Source: New Constructs, LLC and company filings

Figure 13 presents the data charted in Figure 12.

Figure 13: Very Dangerous ETFs & Mutual Funds by Investment Style

NewConstructs_VeryDangerousStyleRatingsStats_4Q16

Source: New Constructs, LLC and company filings

This article originally published here on October 21, 2016.

Disclosure: David Trainer, Kyle Martone, and Kyle Guske II receive no compensation to write about any specific stock, sector or theme.

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Click here to download a PDF of this report.

1 Comment

  • thomas mccann

    November 4, 2016

    Your selection of NCARX appears to be premature. It looks like it has only existed for 4-5 months. Lost 4 % so far. Glad I have not followed your advice.

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