How To Find the Best Sector ETFs

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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 43 different Financial ETFs and at least 187 ETFs across all sectors. Do investors need that many choices? How different can the ETFs be?

Those 43 Financials ETFs are very different. With anywhere from 20 to 558 holdings, many of these Financials ETFs have drastically different portfolios, creating drastically different investment implications.

The same is true for the ETFs in any other sector, as each offers a very different mix of good and bad stocks. Consumer Staples ranks first. Financials ranks last. Details on the Best & Worst ETFs in each sector are here

A Recipe for Paralysis By Analysis

We firmly believe ETFs for a given sector should not all be that different. We think the large number of Financials (or any other) sector of 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 558 stocks, and sometimes even more, for one ETF.

Any investor worth his or her salt recognizes that analyzing the holdings of an ETF is critical to finding the best ETF. Figure 1 shows our top-rated ETF for each sector.

Figure 1: The Best ETF in Each Sector

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Sources:   New Constructs, LLC and company filings

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 a fund that might blow up. Buying a fund 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.

PERFORMANCE OF FUND’S HOLDINGS = PERFORMANCE OF FUND

If Only Investors Could Find Funds Rated by Their Holdings

New Constructs covers over 3000 stocks and is known for the due diligence we do for each stock we cover. Accordingly, our coverage of ETFs leverages the diligence we do on each stock by rating ETFs based on the aggregated ratings of the stocks each ETF holds.

State Street SPDR Consumer Staples Select Sector Fund (XLP) is the top-rated Consumer Staples ETF and the overall best ETF of the 187 sector ETFs that we cover.

The worst ETF in Figure 1 is Fidelity MSCI Telecom Services ETF, which gets a Dangerous or 2-star rating. One would think ETF providers could do better for this sector.

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

Photo Credit: Adam Scottow (Flickr)

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