The Small Cap Growth style ranks eighth out of the twelve fund styles as detailed in our 1Q17 Style Ratings for ETFs and Mutual Funds report. Last quarter, the Small Cap Growth style ranked eleventh. It gets our Dangerous rating, which is based on an aggregation of ratings of 12 ETFs and 388 mutual funds in the Small Cap Growth style as of January 31, 2017. See a recap of our 4Q16 Style Ratings here.
Figures 1 and 2 show the five best and worst rated ETFs and mutual funds in the style. Not all Small Cap Growth style ETFs and mutual funds are created the same. The number of holdings varies widely (from 20 to 1,187). This variation creates drastically different investment implications and, therefore, ratings.
Investors seeking exposure to the Small Cap Growth style should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2.
Here is our ETF and mutual fund rating methodology, which leverages our rigorous analysis of each fund’s holdings. We think advisors and investors focused on prudent investment decisions should include analysis of fund holdings in their research process for ETFs and mutual funds.
Figure 1: ETFs with the Best & Worst Ratings – Top 5
* Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity.
Sources: New Constructs, LLC and company filings
First Trust Small Cap Growth AlphaDEX Fund (FYC) 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 5
* Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity.
Sources: New Constructs, LLC and company filings
Guggenheim S&P SmallCap 600 Pure Growth (RZG) is the top-rated Small Cap Growth ETF and Neuberger Berman Genesis Fund (NBGAX) is the top-rated Small Cap Growth mutual fund. RZG earns a Neutral rating while NBGAX earns a Attractive rating.
PowerShares DWA SmallCap Momentum Portfolio (DWAS) is the worst rated Small Cap Growth ETF and Slger Small Cap Focus Fund (AOFCX) is the worst rated Small Cap Growth mutual fund. DWAS earns a Dangerous rating while AOFCX earns a Very Dangerous rating.
The Danger Within
Buying a fund without analyzing its holdings is like buying a stock without analyzing its business and finances. Put another way, research on fund holdings is necessary due diligence because a fund’s performance is only as good as its holdings’ performance. Don’t just take our word for it, see what Barron’s says on this matter.
PERFORMANCE OF HOLDINGs = PERFORMANCE OF FUND
Figures 3 and 4 show the rating landscape of all Small Cap Growth ETFs and mutual funds.
Figure 3: Separating the Best ETFs From the Worst Funds
Sources: New Constructs, LLC and company filings
Figure 4: Separating the Best Mutual Funds From the Worst Funds
Sources: New Constructs, LLC and company filings
This article originally published here on February 1, 2017.
Disclosure: David Trainer, Kyle Guske II, and Kyle Martone receive no compensation to write about any specific stock, style, or theme.