Our forward-looking ETF and mutual fund ratings provide diligence on ETFs and mutual funds that is rarely found on individual stocks. Through this work, we can discern which ETFs and mutual funds are the best in breed.

We’ve been bullish on certain Financials stocks for quite some time and this week’s Long Idea is a Very Attractive-rated Financials ETF that maximizes allocation to good stocks in the sector, minimizes allocation to bad stocks, and taps into larger macro tailwinds.

Below, we provide an excerpt from our latest Long Idea report to show how our research finds opportunities the market is missing. Get the full report a la carte here.

You need a Professional Membership or higher to view all the content on this page.

Already a member?

Learn more about our research here.

This ETF Provides Better Risk/Reward Than the Market

This ETF tracks a subset of the Financials sector and holds highly profitable and attractively valued companies.

Figure 2 in the full report shows our detailed rating for the ETF, which includes each of the criteria we use to rate all ETFs and mutual funds under coverage. These criteria are the same for our Stock Ratings, because the performance of an ETF’s holdings drives the performance of the ETF after fees. Figure 2 also compares the ETF’s rating with those of IWV, SPY, and IWM.

This ETF’s holdings are superior or equal to SPY in four of the five criteria that make up our Portfolio Management Rating. Specifically:

  • The ETF’s holdings earn a Very Attractive Economic vs. Reported EPS rating, driven by positive and rising economic earnings per share, compared to an Attractive rating for SPY.
  • The ETF’s ROIC is 18%, which is lower than SPY’s at 35%, but still well above the cost of capital and indicative of a highly profitable business.
  • The ETF’s 2-yr avg FCF yield of 4% is higher than SPY’s at 1%.
  • The PEBV ratio for the ETF’s holdings is 0.8, which is much lower (better) than SPY’s at 3.9.
  • Our discounted cash flow analysis reveals an average market-implied GAP of just seven years for the ETF’s holdings compared to 62 years for SPY.

The takeaway?

This ETF allocates to profitable businesses, as measured by rising economic earnings and an 18% ROIC, which trade at much cheaper prices than the stocks in the S&P 500.

This ETF Is Better than the Financials Sector, Too

Our analysis reveals that this ETF allocates more capital to profitable companies with cheaper valuations than State Street Financial Select Sector SPDR ETF (XLF), even as XLF also earns a Very Attractive rating.

Per Figure 3, the ETF allocates 81% of its assets to Attractive-or-better rated stocks compared to 49% for XLF.

The ETF allocates 92% of its assets to Neutral-or-better rated stocks compared to 76% for XLF. It allocates just 8% of its assets to Unattractive-or-worse rated stocks compared to 21% for XLF.

Figure 3: This ETF’s Holdings Are Superior to XLF

Sources: New Constructs, LLC and company filings

Below Average Costs for Superior Holdings

Below average fees for superior holdings make this ETF even more attractive in any market.

This ETF’s 0.42% total annual costs (TAC) are below the 1.45% simple average of the Financials ETFs and mutual funds for which we have assets data under coverage. The ETF’s TAC are equal to the 0.42% asset-weighted average.

Figure 6 in the full report shows our breakdown of the ETF’s total annual costs, which is available for all 6,800+ mutual funds and ETFs under coverage.

…there’s much more in the full report. You can buy the report a la carte here.

Or, become a Professional or Institutional member – they get all Long Idea reports.

Interested in starting your membership to get access to more of our research? Get more details here.