With an ever-growing list of similar-sounding ETFs to choose from, finding the best is an increasingly difficult task. How can investors shift the odds in their favor?
Don’t Trust ETF Labels
There are at least 79 different Technology ETFs and at least 287 ETFs across eleven sectors. Do investors need 26+ choices on average per sector? How different can the ETFs be?
Those 79 Technology ETFs are very different from each other. With anywhere from 22 to 562 holdings, many of these ETFs have drastically different portfolios with differing risk profiles and performance outlooks.
The same is true for the ETFs in any other sector, as each offers a very different mix of good and bad stocks. Energy ranks first for stock selection. Utilities ranks last. Details on the Best & Worst ETFs in each sector are here.
Avoiding Analysis Paralysis
We think the large number of sector ETFs hurts investors more than it helps. Manually conducting a deep analysis for every ETF is simply not a realistic option. As a result, investors conduct insufficient analysis and miss profitable opportunities. Analyzing ETFs with the proper diligence[1] is far more complex than analyzing stocks because it involves analyzing all holdings within each ETF. As stated above, there can be as many as 562 stocks or more for one ETF.
Anyone focused on fulfilling the fiduciary duty of care recognizes that analyzing the holdings[2] of an ETF is critical to finding the best ETF. More reliable & proprietary fundamental data, proven in The Journal of Financial Economics, drives our research and analysis of ETF holdings and provides investors with a new source of alpha. Figure 1 shows our top-rated ETF for each sector.
Figure 1: The Best ETF in Each Sector
* Best ETFs excludes ETFs with Total Net Assets (TNA) under $100 million due to inadequate liquidity
Sources: New Constructs, LLC and company filings
Amongst the ETFs in Figure 1, VanEck Steel ETF (SLX) ranks first overall, iShares U.S. Home Construction ETF (ITB) ranks second, and Invesco KBW Bank ETF (KBWB) ranks third. VanEck Mortgage REIT Income ETF (MORT) 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 – FEES = PERFORMANCE OF FUND
Analyzing each holding within funds is no small task. Our Robo-Analyst technology enables us to perform this diligence at scale and provide the research needed to fulfill the fiduciary duty of care. More of the biggest names in the financial industry (see At BlackRock, Machines Are Rising Over Managers to Pick Stocks) are now leveraging technology in the investment research process. Technology may be the only solution to the dual mandate for research: cut costs and fulfill the fiduciary duty of care. Investors, clients, advisors, and analysts deserve the latest in technology to get the diligence required to make prudent investment decisions.
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 stocks each ETF holds.
VanEck Steel ETF (SLX) is not only the top-rated Basic Materials ETF but is also the overall top-rated sector ETF out of the 287 sector ETFs that we cover.
The worst ETF in Figure 1 is VanEck Mortgage REIT Income ETF (MORT), which gets an Unattractive rating. One would think ETF providers could do better for this sector.
This article was originally published on February 6, 2023.
Disclosure: David Trainer, Kyle Guske II, and Italo Mendonça receive no compensation to write about any specific stock, sector, or theme.
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[1] Three independent studies from respected institutions prove the superiority of our data, models, and ratings. Learn more here.
[2] Harvard Business School features the powerful impact of our research automation technology in the case New Constructs: Disrupting Fundamental Analysis with Robo-Analysts.