How To Find The Best Style ETFs: Q4 2019 by David Trainer

Summary

The large number of ETFs hurts investors more than it helps as too many options become paralyzing.
Performance of an ETF's holdings are equal to the performance of an ETF.
Our coverage of ETFs leverages the diligence we do on each stock by rating ETFs based on the aggregated ratings of their holdings.
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Finding the best ETFs is an increasingly difficult task in a world with so many to choose from. How can you pick with so many choices available?

Don’t Trust ETF Labels

There are at least 152 different All Cap Blend ETFs and at least 508 ETFs across 12 styles. Do investors need 42-plus choices on average per style? How different can the ETFs be?

Those 152 All Cap Blend ETFs are very different. With anywhere from 23 to 8,125 holdings, many of these All Cap Blend ETFs have drastically different portfolios, creating drastically different investment implications.

The same is true for the ETFs in any other style, as each offers a very different mix of good and bad stocks. Large Cap Blend ranks first for stock selection. Small Cap Growth ranks last. Details on the Best & Worst ETFs in each style are here.

How to Avoid Paralysis by Analysis

We think the large number of All Cap Blend (or any other) style ETFs hurts investors more than it helps because too many options can be paralyzing. It's simply not possible for the majority of investors to properly assess the quality of so many ETFs. Analyzing ETFs, done with the proper diligence[1], is far more difficult than analyzing stocks because it means analyzing all the stocks within each ETF. As stated above, that can be as many as 8,125 stocks, and sometimes even more, for one ETF.

Anyone focused on fulfilling the fiduciary duty of care recognizes that analyzing the holdings[2] of an ETF is critical to finding the best ETF. Figure 1 shows our top-rated ETF for each style.

Figure 1: The Best ETF in Each Style

Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity Sources: New Constructs, LLC and company filings

Among the ETFs in Figure 1, Fidelity Value Factor ETF (FVAL) ranks first overall, VictoryShares U.S. Multi-Factor Minimum Volatility ETF (VSMV) ranks second, and FlexShares Quality Dividend Index Fund (QDF) ranks third. iShares Morningstar Small Cap Value ETF (JKL) ranks last.

How to Avoid “The Danger Within”

Why do you need to know the holdings of ETFs before you buy?

You need to be sure you do not buy an ETF that might blow up. Buying an ETF without analyzing its holdings is like buying a stock without analyzing its business and finances. No matter how cheap, if it holds bad stocks, the ETF’s performance will be bad.

Performance of Fund's = 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.

If Only Investors Could Find Funds Rated by Their Holdings Our ETF ratings leverage our stock coverage. We rate ETFs based on the aggregated ratings of the stocks each ETF holds.

Fidelity Value Factor ETF (FVAL) is not only the top-rated All Cap Value ETF, but also is the overall top-ranked style ETF (that meets liquidity minimums) out of the 508 style ETFs that we cover.

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Author Bio:

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