Small Cap Growth Style 3Q17: Best and Worst

The Small Cap Growth style ranks eleventh out of the twelve fund styles as detailed in our 3Q17 Style Ratings for ETFs and Mutual Funds report. Last quarter, the Small Cap Growth style ranked eleventh as well. It gets our Unattractive rating, which is based on an aggregation of ratings of 12 ETFs and 386 mutual funds in the Small Cap Growth style as of July 26, 2017. See a recap of our 2Q17 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 25 to 1171). 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.

Our Robo-Analyst technology empowers our unique 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

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

Walden SMID Cap Growth (WASMX) and River Oak Discovery Fund (RIVSX) are excluded from Figure 2 because their total net assets (TNA) are below $100 million and do not meet our liquidity minimums.

Guggenheim S&P MIdCap 400 Pure Growth (RFG) is the top-rated Small Cap Growth ETF and Virtus KAR Small Cap Value Fund (VQSRX) is the top-rated Small Cap Growth mutual fund. RFG earns an Attractive rating and VQSRX earns a Very Attractive rating.

iShares Morningstar Small Cap Growth ETYF (JKK) is the worst rated Small Cap Growth ETF and Delaware Small Cap Growth Fund (DSGDX) is the worst rated Small Cap Growth mutual fund. JKK earns an Unattractive rating and DSGDX earns a Very Unattractive 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

Analyzing each holding within funds is no small task. Our Robo-Analyst technology enables us to perform this diligence with scale and provide the research needed to fulfill the fiduciary duty of care. More of the biggest names in the financial industry (see At BlackRock, Machines Are Rising Over Managers to Pick Stocks) are now embracing technology to leverage machines in the investment research process. Technology may be the only solution to the dual mandate for research: cut costs and fulfill the fiduciary duty of care. Investors, clients, advisors and analysts deserve the latest in technology to get the diligence required to make prudent investment decisions.

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 on July 27, 2017.

Disclosure: David Trainer, Kyle Guske II, and Kenneth James receive no compensation to write about any specific stock, style, or theme.

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