Large Cap Blend Style 4Q16: Best and Worst

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The Large Cap Blend style ranks first out of the twelve fund styles as detailed in our 4Q16 Style Ratings for ETFs and Mutual Funds report. Last quarter, the Large Cap Blend style ranked first as well. It gets our Attractive rating, which is based on an aggregation of ratings of 33 ETFs and 857 mutual funds in the Large Cap Blend style as of October 25, 2016. See a recap of our 3Q16 Style Ratings here.

Figures 1 and 2 show the five best and worst rated ETFs and mutual funds in the style. Not all Large Cap Blend style ETFs and mutual funds are created the same. The number of holdings varies widely (from 20 to 1,385). This variation creates drastically different investment implications and, therefore, ratings.

Investors seeking exposure to the Large Cap Blend style should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2.

Figure 1: ETFs with the Best & Worst Ratings – Top 5LargeCapBlend_ETFRatings* Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity.

Sources: New Constructs, LLC and company filings

State Street SPDR MSCI USA StrategicFactors ETF (QUS) is excluded from Figure 1 because its total net assets (TNA) are below $100 million and do not meet our liquidity minimums.

Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5LargeCapBlend_MFRating* Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity.

Sources: New Constructs, LLC and company filings

Nuveen Concentrated Core Fund (NCARX, NCAFX, NCAEX) is excluded from Figure 2 because its total net assets (TNA) are below $100 million and do not meet our liquidity minimums.

State Street DOW Jones Industrial Average ETF (DIA) is the top-rated Large Cap Blend ETF and AB Growth & Income Fund (CBBZX) is the top-rated Large Cap Blend mutual fund. Both earn a Very Attractive rating.

PowerShares Russell 1000 Equal Weight Portfolio (EQAL) is the worst rated Large Cap Blend ETF and Vitus Equity Trend Fund (VAPAX) is the worst rated Large Cap Blend mutual fund. EQAL earns a Neutral rating and VAPAX earns a Very Dangerous rating.

Wal-Mart Stores (WMT: $69/share) is one of our favorite stocks held by EPS and earns an Attractive rating., WMT was a featured Long Idea in August 2015 as well. WMT’s has grown after-tax profit (NOPAT) by 3% compounded annually over the past decade. Despite fluctuations, WMT consistently earns a double digit return on invested capital (ROIC) and currently earns a 10% ROIC over the last twelve months (TTM). Despite the strong underlying fundamentals, the market has continued to undervalue WMT, as it has since 2011. At its current price of $69/share, WMT has a price-to-economic book value (PEBV) ratio of 0.8. This ratio means the market expects WMT’s NOPAT to permanently decline by 20%. If Wal-Mart can continue to grow NOPAT by just 3% compounded annually for the next decade, the stock is worth $112/share today – a 62% upside.

Nucor Corporation (NUE: $48/share) is one of our least favorite stocks held by VAPAX and earns a Dangerous rating. Over the past decade, Nucor’s NOPAT has declined by 13% compounded annually. The company’s ROIC has fallen from 25% in 2005 to 5% TTM. Despite the deterioration in fundamentals, NUE is up over 17% year-to-date, and shares are significantly overvalued. To justify its current price of $48/share, NUE must grow NOPAT by 16% compounded annually over the next 11 years. This expectation seems rather optimistic given NUE’s inability to grow NOPAT over the past decade.

Figures 3 and 4 show the rating landscape of all Large Cap Blend ETFs and mutual funds.

Figure 3: Separating the Best ETFs From the Worst Funds

LargeCapBlend_ETFLandscapeSources: New Constructs, LLC and company filings

Figure 4: Separating the Best Mutual Funds From the Worst Funds

LargeCapBlend_MFLandscapeSources: New Constructs, LLC and company filings

This article originally published here on October 26, 2016.

Disclosure: Kyle Martone owns Wal-Mart Stores (WMT). David Trainer, Kyle Guske and Kyle Martone receive no compensation to write about any specific stock, style, or theme.

Click here to download a PDF of this report.

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