The Best and Worst of the Large Cap Blend Style 2Q16

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The Large Cap Blend style ranks second out of the twelve fund styles as detailed in our 2Q16 Style Ratings for ETFs and Mutual Funds report. Last quarter, the Large Cap Blend style ranked first. It gets our Attractive rating, which is based on aggregation of ratings of 37 ETFs and 845 mutual funds in the Large Cap Blend style as of May 3, 2016. See a recap of our 1Q16 Style Ratings here.

Figures 1 and 2 show the five best and worst rated ETFs and mutual funds in the style. Not all Large Cap Blend style ETFs and mutual funds are created the same. The number of holdings varies widely (from 16 to 3810). This variation creates drastically different investment implications and, therefore, ratings.

Investors seeking exposure to the Large Cap Blend style should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2.

Figure 1: ETFs with the Best & Worst Ratings – Top 5

NewConstructs_LargeCapETFRatings_2Q16

* Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity.

Sources: New Constructs, LLC and company filings

WisdomTree Total Earnings Fund (EXT), FlexShares U.S. Quality Large Cap Index Fund (QLC), and State Street SPDR MSCI USA Quality Mix ETF (QUS) are excluded from Figure 1 because their total net assets (TNA) are below $100 million and do not meet our liquidity minimums.

Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5

NewConstructs_LargeCapMFRatings_2Q16

* Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity.

Sources: New Constructs, LLC and company filings

State Street SPDR Dow Jones Industrial Average ETF Trust (DIA) is the top-rated Large Cap Blend ETF and Financial Investors Trust Vulcan Value Partners Fund (VVPLX) is the top-rated Large Cap Blend mutual fund. Both earn a Very Attractive rating.

First Trust Mega Cap AlphaDEX Fund (FMK) is the worst rated Large Cap Blend ETF and AmericaFirst Seasonal Trends Fund (STQAX) is the worst rated Large Cap Blend mutual fund. FMK earns a Neutral rating and STQAX earns a Very Dangerous rating.

Franklin Resources (BEN: $38/share) is one of our favorite stocks held by VVPLX and earns a Very Attractive rating. Over the past decade, Franklin Resources has grown after-tax profit (NOPAT) by 8% compounded annually. The company has improved its return on invested capital (ROIC) from 21% in 2005 to a top-quintile 26% over the last twelve months. Possibly most impressive, Franklin has generated positive economic earnings in every year since 2003. Despite the success, BEN remains undervalued. At its current price of $38/share, Franklin Resources has a price-to-economic book value (PEBV) ratio of 0.8. This ratio means that the market expects Franklin’s NOPAT to permanently decline by 20%. If Franklin Resources can grow NOPAT by 3% compounded annually over the next decade, the stock is worth $60/share today – a 58% upside.

NRG Energy (NRG: $15/share) is one of our least favorite stocks held by EQAL and earns a Dangerous rating. Since 2006, NRG’s NOPAT has declined by 1% compounded annually. The company’s ROIC has fallen from 9% in 2006 to a bottom-quintile 2% over the last twelve months. Additionally, over the past five years, NRG has generated a cumulative -$10.8 billion in free cash flow. Despite these operational struggles, NRG remains overvalued. To justify its current price of $15/share, NRG must grow NOPAT by 9% compounded annually for the next 11 years.

Figures 3 and 4 show the rating landscape of all Large Cap Blend ETFs and mutual funds.

Figure 3: Separating the Best ETFs From the Worst Funds

NewConstructs_LargeCapETFLandscape_2Q16

Sources: New Constructs, LLC and company filings

Figure 4: Separating the Best Mutual Funds From the Worst Funds

NewConstructs_LargeCapMFLandscape_2Q16

Sources: New Constructs, LLC and company filings

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

Click here to download a PDF of this report.

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