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 36 different Financials ETFs and at least 175 ETFs across ten sectors. Do investors need 17+ choices on average per sector? How different can the ETFs be?
Those Financials ETFs are very different. With anywhere from 24 to 413 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 rank first for stock selection. Energy ranks last. Details on the Best & Worst ETFs in each sector are here.
Paralysis By Analysis
We think the large number of Financials (or any other) sector 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, there can be as many as 413 stocks or more for one ETF.
Anyone focused on fulfilling the fiduciary duty of care 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
Sources: New Constructs, LLC and company filings
Amongst the ETFs in Figure 1, Oppenheimer Financials Sector Revenue ETF (RWW) ranks first overall, EcoLogical Strategy ETF (HECO) ranks second, and PowerShares Dynamic Leisure & Entertainment Portfolio (PEJ) ranks third. PowerShares Water Resources Portfolio (PHO) 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
Analyzing each holding within funds is no small task. Our Robo-Analyst technology enables us to perform this diligence with 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 embracing technology to leverage machines 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.
Oppenheimer Financials Sector Revenue ETF (RWW) is not only the top-rated Financials ETF, but is also the overall best sector ETF out of the 175 sector ETFs that we cover.
The worst ETF in Figure 1 is PowerShares Water Resources Portfolio (PHO), which gets a Neutral rating. One would think ETF providers could do better for this sector.
This article originally published here on August 3, 2017.
Disclosure: David Trainer, Kyle Guske II, and Kenneth James receive no compensation to write about any specific stock, sector, or theme.
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