The small-cap blend style ranks 11th out of the twelve fund styles as detailed in my style rankings for ETFs and mutual funds. It gets my Dangerous rating, which is based on aggregation of ratings of 21 ETFs and 657 mutual funds in the small-cap blend style as of October 22, 2012. Prior reports on the best & worst ETFs and mutual funds in every sector and style are here.
Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the style. Not all small-cap blend style ETFs and mutual funds are created the same. The number of holdings varies widely (from 20 to 2021), which creates drastically different investment implications and ratings. The best ETFs and mutual funds allocate more value to Attractive-or-better-rated stocks than the worst, which allocate too much value to Neutral-or-worse-rated stocks.
To identify the best and avoid the worst ETFs and mutual funds within the small-cap blend style, investors need a predictive rating based on (1) stocks ratings of the holdings and (2) the all-in expenses of each ETF and mutual fund. Investors need not rely on backward-looking ratings. My fund rating methodology is detailed here.
Investors should not buy any small-cap blend ETFs or mutual funds because none get an Attractive-or-better rating. If you must have exposure to this style, you should buy a basket of Attractive-or-better rated stocks and avoid paying undeserved fund fees. Active management has a long history of not paying off.
Get my ratings on all ETFs and mutual funds in this style on my free mutual fund and ETF screener.
Figure 1: ETFs with the Best & Worst Ratings – Top 5
* Best ETFs exclude ETFs with NAVs less than 100 million.
Sources: New Constructs, LLC and company filings
Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5
* Best mutual funds exclude funds with NAV’s less than 100 million.
Sources: New Constructs, LLC and company filings
iShares S&P SmallCap 600 Index Fund (IJR) is my top-rated small-cap blend ETF and earns my Dangerous rating. Virtus Equity Trust: Virtus Quality Small-Cap Fund (PXQSX) is my top-rated small-cap blend mutual fund and earns my Neutral rating.
iShares Russell Microcap Index Fund (IWC) is my worst-rated small-cap blend ETF and earns my Dangerous rating. SunAmerica Focused Series, Inc: Focused Small-Cap Value Portfolio (SSSAX) is my worst-rated small-cap blend mutual fund and earns my Very Dangerous rating.
Figure 3 shows that 512 out of the 2590 stocks (over 26% of the total net assets) held by small-cap blend ETFs and mutual funds get an Attractive-or-better rating. However, none of the 21 small-cap blend ETFs and none of the 657 small-cap blend mutual funds get an Attractive-or-better rating.
The takeaways are: mutual fund managers allocate too much capital to low-quality stocks and small-cap blend ETFs hold poor quality stocks.
Figure 3: Small-cap Blend Style Landscape For ETFs, Mutual Funds & Stocks
Sources: New Constructs, LLC and company filings
As detailed in “Cheap Funds Dupe Investors”, the fund industry offers many cheap funds but very few funds with high-quality stocks, or with what I call good portfolio management.
Investors need to tread carefully when considering small-cap blend ETFs and mutual funds, as no ETFs or mutual funds in the small-cap blend style allocate enough value to Attractive-or-better-rated stocks to earn an Attractive rating. Focus on individual stocks instead.
Western Refining, Inc. (WNR) is one of my favorite stocks held by small-cap blend ETFs and mutual funds and earns my Very Attractive rating. WNR’s stock price (~$25.53) implies that the company’s cash flows will permanently decline by 59%, an extraordinarily low threshold for a company with a return on invested capital (ROIC) of 19%.
Essex Property Trust, Inc. (ESS) is one of my least favorite stocks held by small-cap blend ETFs and mutual funds and earns my Very Dangerous rating. ESS is a perennial value destroyer, having generated positive economic earnings only once in the last 14 years. Not only does ESS destroy value, but investors need to be cautious of their misleading earnings – their reported earnings are positive and rising while their true economic earnings are negative and declining. ESS is a stock to avoid.
Figures 4 and 5 show the rating landscape of all small-cap blend ETFs and mutual funds.
Our style rankings for ETFs and mutual funds report ranks all styles and highlights those that offer the best investments.
Figure 4: Separating the Best ETFs From the Worst Funds
Sources: New Constructs, LLC and company filings
Figure 5: Separating the Best Mutual Funds From the Worst Funds
Sources: New Constructs, LLC and company filings
Review my full list of ratings and rankings along with reports on all 21 ETFs and 657 mutual funds in the small-cap blend style.
Disclosure: I own WNR. I receive no compensation to write about any specific stock, sector, style or theme.