The Large Cap Growth style ranks fifth out of the twelve fund styles as detailed in my Style Rankings for ETFs and Mutual Funds report. It gets my Neutral rating, which is based on aggregation of ratings of 24 ETFs and 667 mutual funds in the Large Cap Growth style as of April 16, 2014. Prior reports on the best & worst ETFs and mutual funds in every sector and style are here.
Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the style. Not all Large Cap Growth style ETFs and mutual funds are created the same. The number of holdings varies widely (from 19 to 633), which creates drastically different investment implications and ratings. The best ETFs and mutual funds allocate more value to Attractive-or-better-rated stocks than the worst, which allocate too much value to Neutral-or-worse-rated stocks.
To identify the best and avoid the worst ETFs and mutual funds within the Large Cap Growth style, investors need a predictive rating based on (1) stocks ratings of the holdings and (2) the all-in expenses of each ETF and mutual fund. Investors need not rely on backward-looking ratings. My fund rating methodology is detailed here.
Investors should not buy any Large Cap Growth ETFs or mutual funds because none get an Attractive-or-better rating. If you must have exposure to this style, you should buy a basket of Attractive-or-better rated stocks and avoid paying undeserved fund fees. Active management has a long history of not paying off.
Figure 1: ETFs with the Best & Worst Ratings – Top 5
Sources: New Constructs, LLC and company filings
State Street SPDR MFS Systematic Growth Equity ETF (SYG) is excluded from Figure 1 because its total net assets (TNA) are below $100 million and do not meet our liquidity standards.
Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5
Sources: New Constructs, LLC and company filings
Schwab U.S. Large-Cap Growth ETF (SCHG) is my top-rated Large Cap Growth ETF and Massachusetts Investors Growth Stock Fund (MIGNX) is my top-rated Large Cap Growth mutual fund. Both earn my Neutral rating.
Columbia Select Large Cap Growth ETF (RWG) is my worst-rated Large Cap Growth ETF and Quaker Investment Trust: Quaker Strategic Growth Fund (QUAGX) is my worst-rated Large Cap Growth mutual fund. RWG earns my Dangerous rating and QUAGX earns my Very Dangerous rating.
Figure 3 shows that 161 out of the 995 stocks (over 20% of the market value) in Large Cap Growth ETFs and mutual funds get an Attractive-or-better rating. However, 0 out of 24 Large Cap Growth ETFs and 0 out of 667 Large Cap Growth mutual funds get an Attractive-or-better rating.
The takeaways are: mutual fund managers allocate too much capital to low-quality stocks and Large Cap Growth ETFs hold poor quality stocks.
Figure 3: Large Cap Growth Style Landscape For ETFs, Mutual Funds & Stocks
Investors need to tread carefully when considering Large Cap Growth ETFs and mutual funds, as no ETFs or mutual funds in the Large Cap Growth style allocate enough value to Attractive-or-better-rated stocks to earn an Attractive rating. Investors looking for exposure to this style would be better suited with individual stocks.
Verizon Communications, Inc. (VZ) is one of my favorite stocks held by Large Cap Growth ETFs and mutual funds and earns my Attractive rating. Over the past 10 years, VZ has grown after-tax profits (NOPAT) by 13% compounded annually. At the same time, VZ has increased their return on invested capital (ROIC) to 9%, up from 3% in 2003. Despite consistent profit growth and increased profitability, VZ remains undervalued. At its current valuation of ~$47/share, VZ has a price-to-economic book value (PEBV) ratio of 1.0. This ratio implies the market expects VZ to never grow NOPAT by any meaningful amount. Given VZ’s position as one of the market leaders in its industry and the potential for FiOS to take market share away from Comcast (CMCSA) in broadband, VZ should easily surpass this low expectation.
Amazon.com Inc. (AMZN) is one of my least favorite stocks held by Large Cap Growth ETFs and mutual funds and earns my Very Dangerous rating. Over the past nine years, AMZN has grown NOPAT by only 2% compounded annually. The company’s ROIC has fallen to a bottom quintile 4%, down from 38% back in 2009. As I wrote in May 2013, AMZN is priced for significant profit growth, which I do not believe to be possible. Since then, Amazon’s NOPAT margin and ROIC have declined even further. To justify its current price of ~$316/share, AMZN would need to grow NOPAT by 21% compounded annually for 22 years. That high expectation for future profit growth leaves no upside and plenty of downside risk. Investors should avoid AMZN.
Figures 4 and 5 show the rating landscape of all Large Cap Growth ETFs and mutual funds.
My Style Rankings for ETFs and Mutual Funds report ranks all styles and highlights those that offer the best investments.
Figure 4: Separating the Best ETFs From the Worst Funds
Figure 5: Separating the Best Mutual Funds From the Worst Funds
Review my full list of ratings and rankings along with reports on all 24 ETFs and 667 mutual funds in the Large Cap Growth style.
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Kyle Guske II contributed to this report.
Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, sector, style or theme.