The Small Cap Value style ranks last out of the twelve fund styles as detailed in our 1Q17 Style Ratings for ETFs and Mutual Funds report. Last quarter, the Small Cap Value style ranked last as well. It gets our Dangerous rating, which is based on an aggregation of ratings of 19 ETFs and 276 mutual funds in the Small Cap Value 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 Value style ETFs and mutual funds are created the same. The number of holdings varies widely (from 13 to 1,504). This variation creates drastically different investment implications and, therefore, ratings.
Investors seeking exposure to the Small Cap Value 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 Mid Cap Value AlphaDEX Fund (FNK) 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
PowerShares S&P SmallCap Low Volatility Portfolio (XSLV) is the top-rated Small Cap Value ETF and Dean Small Cap Value Fund (DASCX) is the top-rated Small Cap Value mutual fund. Both earn an Attractive rating.
Vanguard Russell 2000 Value Index Fund (VTWV) is the worst rated Small Cap Value ETF and AB Small Cap Value Portfolio (SCYVX) is the worst rated Small Cap Value mutual fund. VTWV earns a Dangerous rating and SCYVX 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 Value 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.