The Intelligent Investor

Sector Rankings For ETFs & Mutual Funds

Table of Contents:

Sector Rankings For ETFs & Mutual Funds

At the beginning of the first quarter of 2013, only the Consumer Staples Sector earns an Attractive rating. My sector ratings are based on the aggregation of my fund ratings for every ETF and mutual fund in each sector. Reports on all sectors will follow per our 1Q13 Best & Worst Sector Preview.

Investors looking for sector funds that hold quality stocks should look no further than the Consumer Staples and Information Technology sectors. Only these sectors house Attractive-or-better rated funds. Figures 6 and 7 provide details. The primary driver behind an Attractive fund rating is good portfolio management, or good stock picking, with low total annual costs

Note that the Attractive-or-better Predictive ratings do not always correlate with Attractive-or-better total annual costs. This fact underscores that (1) low fees can dupe investors and (2) investors should invest only in funds with good stocks and low fees.

See Figures 4 through 13 for a detailed breakdown of ratings distributions by sector. See my free ETF & mutual fund screener for rankings, ratings and free reports on 7000+ mutual funds and 400+ ETFs. My fund rating methodology is detailed here.

All of my reports on the best & worst ETFs and mutual funds in every sector and investment style are available here.

Figure 1: Ratings For All Sectors

1Q13SectorRanking_Fig1

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 28 sector ETFs and mutual funds meet these requirements, which is only 3% of all sector ETFs and mutual funds.

First Trust NASDAQ Technology Dividend Index Fund (TDIC) is my top Information Technology sector ETF. It gets my Very Attractive rating by allocating over 57% of its value to Attractive-or-better-rated stocks.

Cisco Systems Inc. (CSCO) is one of my favorite stocks held by TDIC. With an ROIC of 18%, CSCO’s profitability ranks in the top quintile. Since 1998, Cisco’s NOPAT has grown 15% compounded annually. Nevertheless, the company’s stock, at ~$21/share, implies its NOPAT will permanently decline by over 30%. Low expectations and high cash flows mean good risk/reward for investors.

Rydex Series Fund: Utilities Fund (RYUTX) is my worst Utilities sector mutual fund. It gets my Very Dangerous rating by allocating over 89% of its value to Neutral-or-worse-rated stocks, and to make matters worse, nails investors with total annual costs of 6.49%.

Dominion Resources Inc. (D) is one of my least favorite stocks held by RYUTX. It gets my Dangerous rating. Both its economic earnings and its free cash flow yield are negative, at 4%, the company’s ROIC is in the bottom quintile. And yet, the valuation of the stock at ~$53/share implies the company’s profits will grow by nearly 25%. Those are high expectations for a company with negative cash flows. There are too many other more attractive stocks for investors to settle for D.

Figure 2 shows the distribution of our Predictive Ratings for all ETFs and mutual funds.

Figure 2: Distribution of ETFs & Mutual Funds (Assets and Count) by Predictive Rating

1Q13SectorRanking_Fig2Source: 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 Dangerous funds is almost 6 times that of Very Attractive funds.

Figure 3: Predictive Rating Distribution Stats

1Q13SectorRanking_Fig3* 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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Trainer brings insight and transparency to research on stocks, ETFs and mutual funds.

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David Trainer

Trainer brings insight and transparency to research on stocks, ETFs and mutual funds.
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