How to Find the Best Style ETFs 2Q16

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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 71 different All Cap Blend ETFs and at least 294 ETFs across twelve styles. Do investors need 24+ choices on average per style? How different can the ETFs be?

Those 71 All Cap Blend ETFs are very different. With anywhere from 20 to 3691 holdings, many of these All Cap Blend ETFs have drastically different portfolios, creating drastically different investment implications.

The same is true for the ETFs in any other style, as each offers a very different mix of good and bad stocks. Large Cap Value ranks first for stock selection. Small Cap Value ranks last. Details on the Best & Worst ETFs in each style are here.

Paralysis By Analysis

We think the large number of All Cap Blend (or any other) style 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 3691 stocks, and sometimes even more, for one ETF.

Any investor focused on fulfilling fiduciary duties recognizes that analyzing the holdings of an ETF is critical to finding the best ETF. Figure 1 shows our top rated ETF for each style.

Figure 1: The Best ETF in Each Style

NewConstructs_BestStyleETFs_2Q16

Sources:   New Constructs, LLC and company filings

Amongst the ETFs in Figure 1, ValueShares U.S. Quantitative Value ETF (QVAL) ranks first overall, First Trust NASDAQ Rising Dividend Achievers (RDVY) ranks second, and SPDR S&P 500 Buyback ETF (SPYB) ranks third. SPDR S&P 600 Small Cap Growth (SLYG) ranks last.

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 an ETF that might blow up. Buying an ETF 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. Don’t just take my word for it, see what Barron’s says on this matter.

PERFORMANCE OF FUND’S HOLDINGS = PERFORMANCE OF FUND

If Only Investors Could Find Funds Rated by Their Holdings

Our ETF ratings leverage our stock coverage. We rate ETFs based on the aggregated ratings of the stock each ETF holds.

ValueShares U.S. Quantitative Value ETF (QVAL) is the top-rated Mid Cap Value ETF and the overall best ETF of the 294 style ETFs that we cover.

The worst ETF in Figure 1 is SPDR S&P 600 Small Cap Growth (SLYG), which gets a Neutral rating. One would think ETF providers could do better for this style.

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.

Photo Credit: Amit Sharma (Flickr)

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