PowerShares Buyback Achievers (PKW) is the #1 “most attractive” ETF out of the 375+ ETFs we ranked according to our predictive rating system.

These rankings come from the 375 reports we published today on ETFs. Each of our ETF reports provides a predictive rating, just like a buy/hold/sell stock rating. We apply the same top-ranked rating system we use for stocks to funds by combining our models for each of the stocks in the fund according to the fund’s allocation to each stock.

Top 5 US Equity ETFs are below. Click on any of them for a free copy of our report:

  1. PowerShares Buyback Achievers (PKW)
  2. iShares High Dividend Equity (HDV)
  3. PowerShares KBW Prop & Casualty Insurance (KBWP)
  4. PowerShares Active Mega Cap (PMA)
  5. Health Care Select Sector SPDR (XLV)

The top 5 ETFs are the best because they allocate the most capital to the best stocks, those with our “attractive” or “very attractive” ratings. We report our top 40 “most attractive” stocks monthly.

Figure 1 details our ratings for all 375 ETFs we currently cover. The pie chart on the left shows the allocation of ETF assets by NAV according to our rating system. The pie chart on the right shows the number of ETFs that fall within each grade of our rating system. Note that no funds get our best rating: “most attractive”. Our ability to cover so many funds comes from the rigorous research we perform on 3000+ stocks.

Figure 1: Breaking Down the ETF Universe

Sources: New Constructs, LLC and company filings

Methodology: Predictive with Strong Track Record

Unlike the other fund rating systems that too often dominate the dialogue on funds, our system is not backward-looking and does not rely on past price performance.

For proof that the backward-looking rating system is becoming obsolete look no farther than one of the biggest fund rating firms in the world. Morningstar recently announced that it was augmenting its entirely backward-looking “star” rating system with an “analyst” rating system that observes expense ratios, manager and sponsor governance and past performance.

This new rating system, according to Morningstar, is expected to add more predictive value to its ratings. More is definitely better in this case since the predictive value of the “star” ratings were perceived across the wealth management industry as very low and often counter-predictive.

Note that the underlying valuation of the stocks held by a fund is not included anywhere in the new “analyst” rating. There is no mention of the underlying profitability (or lack thereof) of the stocks held by the fund either.

Admitting that a backward-looking “star” system was in need of improvement is a step in the right direction, but Morningstar is still far from offering investors the predictive value research they deserve in fund research.

Investors deserve fund research that is rigorous as individual stock research.

For fund research to match the quality of stock research, one must analyze the investment merit of each and every individual stock held by a fund. There is no worthwhile short-cut to this daunting challenge, which has, until now, gone unmet.

Let’s face it: high-quality research on one stock is difficult and rare. The process of translating accounting earnings into economic earnings, by itself, requires a great deal of work for every period of history one covers for a single company.

I am not surprised that no other firms have been able to muster the resources to provide investors with fund research based on rigorous analysis of the underlying holdings for a large number of funds.

Most of the research firms that cover enough stocks to be able to perform fund ratings based on a fund’s underlying holdings are Wall Street firms. And those firms are in the investment banking business, which has proven over time not to share the best interests of the firms’ research clients.

New Constructs ability to cover 3000+ stocks enables us to cover so many funds. Our patented research platform for reversing accounting distortions and discounted cash flow analysis leverages data from the financial footnotes to deliver research of unrivaled quality and accuracy on both stocks and funds.

Today we published research reports with predictive ratings for nearly 400 ETFs. And today investors have access to ETF research that is as rigorous at stock research.

To access our reports, enter the ETF ticker on our home page.

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