Q4 2019 Sector Ratings For ETFs And Mutual Funds by David Trainer
Summary
- Our sector ratings are based on the normalized aggregation of our stock ratings for every stock in each sector.
- The primary driver behind an attractive fund rating is good portfolio management (stock picking) combined with low total annual costs.
- Cheap funds can dupe investors and investors should invest only in funds with good stocks and low fees.
- Looking for a portfolio of ideas like this one? Members of Value Investing 2.0 get exclusive access to our model portfolio. Get started today »
At the beginning of the fourth quarter of 2019, only the Telecom Services, Consumer Non-cyclicals, and Financials sectors earn Attractive-or-better ratings. Our sector ratings are based on the normalized aggregation of our stock ratings for every stock in each sector. Our stock ratings are based on five criteria that assess a firm’s business strength and valuation. See last quarter’s Sector Ratings here.
Investors looking for sector funds that hold quality stocks should look no further than the Financials and Consumer Non-cyclicals sectors. These sectors house a large portion of the highest rated funds. Figures 4 through 7 provide more details. The primary driver behind an Attractive fund rating is good portfolio management, or good stock picking, with low total annual costs.
Attractive-or-better ratings do not always correlate with Attractive-or-better total annual costs. This fact underscores that (1) cheap funds can dupe investors and (2) investors should invest only in funds with good stocks and low fees.
Our Robo-Analyst technology[1] empowers our unique ETF and mutual fund rating methodology, which leverages our rigorous analysis of each fund’s holdings.[2]
See Figures 4 through 13 for a detailed breakdown of ratings distributions by sector.
Figure 1: Ratings for All Sectors
Source: New Constructs, LLC and company filings
To earn an Attractive-or-better Predictive Rating, an ETF or mutual fund must have high-quality holdings and low costs. Only the top 30% of all ETFs and mutual funds earn our Attractive or better ratings.
Fidelity Select Wireless Portfolio (FWRLX) is the top rated Telecom Services fund. It gets our Very Attractive rating by allocating over 40% of its value to Attractive-or-better-rated stocks.
Rydex Series Utilities Fund (RYUTX) is the worst Utilities fund. It gets our Very Unattractive rating by allocating over 84% of its value to Unattractive-or-worse-rated stocks. Making matters worse, it charges investors annual costs of 4.60%.
Figure 2 shows the distribution of our Predictive Ratings for all sector ETFs and mutual funds.
Figure 2: Distribution of ETFs & Mutual Funds (Assets and Count) by Predictive Rating
Source: New Constructs, LLC and company filings
Figure 3 offers additional details on the quality of the sector funds. Note that the average total annual cost of Very Unattractive funds is over eight times that of Very Attractive funds.
Figure 3: Predictive Rating Distribution Stats
- Avg TAC = Weighted Average Total Annual Costs
Source: New Constructs, LLC and company filings
This table shows that only the best of the best funds get our Very Attractive Rating: they must hold good stocks AND have low costs. Investors deserve to have the best of both and we are here to give it to them.
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