Picking good stocks is hard, which is why many investors are drawn to ETFs and mutual funds. However, most ETFs and mutual funds are not good substitutes for picking good stocks. Most of them pick bad stocks and charge high fees for this disservice.
This week’s Danger Zone pick is a fund that allocates too much capital to bad stocks. To make matters worse, it charges well above-average fees. Talk about a double whammy.
Look out, Morningstar gives this fund 5 stars!
We think you should steer clear of this fund.
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
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 5 Star rating. Two other share classes of the fund also earn a 5 Star rating while we rate them Unattractive and Neutral.
Figure 1: Comparing Fund Ratings
Sources: New Constructs, LLC, mutual fund filings, and Morningstar
Holdings Research Reveals a Low-Quality All Cap Blend Portfolio
Our holdings analysis, which leverages our Robo-Analyst technology, reveals that this fund holds lower-quality stocks than its benchmark. For reference, the benchmark earns an Attractive rating.
Per Figure 2 in the full report, this fund allocates 38% of its portfolio to Unattractive-or-worse rated stocks compared to 34% for the benchmark. On the flip side, this fund allocates only 6% of its assets to Attractive-or-better rated stocks compared to 10% for the benchmark.
Per Figure 3 in the full report, our holdings analysis also reveals this 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 just 33% of its portfolio, SPY allocates less to Unattractive-or-worse rated stocks compared to this fund. SPY also allocates more to Attractive-or-better rated stocks compared to this fund, at 10% of its portfolio.
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 in the report shows this fund is inferior to the benchmark and SPY in four of the five criteria 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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