Picking good stocks is hard, which is why many investors are drawn to ETFs and mutual funds as an easy way to own a well-researched diversified portfolio of stocks.

The problem with that strategy is that most ETFs and mutual funds are not good deals. Their managers do not do good research or pick good stocks all the while charging substantial fees. History shows that funds are great at making fund companies money, but they lose money for investors compared to index investing.

This week’s Danger Zone pick is a fund whose managers aren’t living up to the fund’s methodology. They talk a big game about using return on capital and DCF models, but the stocks they pick don’t look good to us. Maybe, these managers have their own version or return on capital or DCF models or, maybe, they want to charge high fees and do little work. We can’t speak to their motivations, but we can say this fund charges way too much to allocate capital to bad stocks.

Investors are getting the worst of both worlds.

More details are below in the excerpt from our full report on this Danger Zone pick, available to Pro and Institutional members. You can buy the full report a la carte here.

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Forward-Looking Research Protects Investors

While legacy fund research is backward-looking, our fund research is forward-looking and based on proven-superior fundamental analysis and ratings on each individual holding.

Figure 1 in the full report shows how our forward-looking Fund Ratings compare to Morningstar’s (MORN) ratings. We rate this fund Very Unattractive (equivalent to Morningstar’s 1 Star) while Morningstar gives the fund a 3 Star rating. Three other share classes of the fund also earn a 3 Star rating while we rate them Unattractive.

Figure 1: Comparing Fund Ratings

Sources: New Constructs, LLC, company filings, mutual fund filings, and Morningstar

Holdings Research Reveals a Low-Quality Mid Cap Blend Portfolio

Our holdings analysis, which leverages our Robo-Analyst AI Agent, reveals that this fund holds lower-quality stocks than its benchmark. For reference, the benchmark earns a Neutral rating.

Per Figure 2 in the full report, the fund allocates 55% of its portfolio to Unattractive-or-worse rated stocks compared to 43% for the benchmark. On the flip side, the fund allocates only 7% of its assets to Attractive-or-better rated stocks compared to 11% for the benchmark.

Per Figure 3 in the full report, our holdings analysis also reveals the fund’s portfolio is lower quality than the S&P 500, as represented by State Street SPDR S&P 500 ETF (SPY), which earns an Attractive rating.

At 43% of its portfolio, SPY allocates less to Unattractive-or-worse rated stocks compared to this fund. SPY and this fund allocate equally to Attractive-or-better rated stocks, at 7% of their portfolios.

Expensive Stocks Drive Very Unattractive Risk/Reward Rating

Figure 4 in the full report shows our detailed rating for this fund, which includes each of the criteria we use to rate all ETFs and mutual funds under coverage. These criteria are the same for our Stock Rating Methodology, as the performance of a mutual fund equals the performance of its holdings minus fees.

Figure 4 also shows this fund is inferior to its benchmark in four of the five criteria (and three of five vs. SPY) that make up our Portfolio Management rating.

…there’s much more in the full report. You can buy the report a la carte here.

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