This week, ETF industry website ETF.com held its annual awards ceremony to recognize the best ETFs for 2020 according to an independent panel of third-party research providers and asset owners. These are not sponsored awards, making winning one even more valuable. CFRA Research is one of the firms that served as a judge, using our forward-looking star rating methodology, proprietary ETF flows data and other market insights to sort through the candidates. While our picks were only sometimes the winner, one key takeaway was that actively managed ETFs have gained acceptance, despite remaining a small slice of the market.
ARK Innovation ETF (ARKK) was chosen as the ETF of the Year. ARKK combines a variety of long-term investment themes, including industrial innovation, genomics and fintech, into one actively managed and concentrated ETF. The fund rose 150% in value and pulled in $9.6 billion of net inflows in 2020 to end the year with $18 billion. Despite the strong run in 2020, ARKK looks favorable to CFRA, earning a five-star rating with relatively high reward potential and risk mitigation scores. While the fund’s stake in Tesla is well known, the fund also has CFRA Buy recommended Spotify Technology and Teladoc Health within its top-10 holdings. ARKK stood out to the ETF.com awards selection committee in a field of index-based ETF finalists.
American Century Focused Dynamic Growth ETF (FDG) was selected as the best new active ETF of 2020. While ARKK and some other actively managed equity ETFs have been trading for a few years, FDG’s launch in early 2020 was novel as American Century was the first firm to offer semitransparent active ETFs. FDG and a sister offering, American Century Focused Large Cap Value ETF (FLV), began trading at the end of the first quarter, providing full holdings on a quarterly basis much like an actively managed mutual fund. FDG earns a four-star rating from CFRA, based primarily on its reward potential, which is aided by key stakes in Alphabet, Amazon.com and Visa. Recent top-10 holdings comprised 51% of assets.
Dimensional International Core Equity Market ETF (DFAI) won top new international/global equity ETF. American Century had an index-based equity presence that predated FDG’s arrival, but DFAI and Dimension US Core Equity Market ETF (DFAU) were the firm’s first two ETFs. DFAI is actively managed with a preference to smaller-cap, highly profitable international companies trading at a low relative price in contrast to market-cap-weighted index-based ETFs. The ETF, which charges a modest 0.18% expense ratio, earns a five-star rating from CFRA for its high reward potential and risk mitigation. While DFAI owns some of the same mega-cap companies found in iShares Core MSCI EAFE ETF (EFA), such as ASML, Nestle and Roche, the active ETF has smaller stakes.
TrueShares beat out iShares and Vanguard with an ESG ETF. TrueShares ESG Active Opportunities ETF (ECOZ) won the Best New ESG ETF, which was likely a surprise to some given the fund had less than $10 million in assets at year-end, far less than iShares ESG MSCI EM Leaders ETF (LDEM) and Vanguard ESG U.S. Corporate Bond ETF (VCEB). CFRA four-star rated ECOZ is actively managed using quantitative and qualitative ESG measures and traditional fundamental analysis to identify companies with long-term capital appreciation potential. Top positions include Enphase Energy and Square, not just Apple and Alphabet, which are commonly found in index-based U.S. ESG ETFs.
Conclusion
CFRA is well equipped to support investors willing to look at relatively new ETFs. With a focus on the securities inside and fund costs, not just past performance, CFRA has star ratings on more than 260 ETFs that first began trading in 2020. With the ability to compare the risk and reward potential of new funds like DFAI, ECOZ, FDG and other new entrants with more established ETFs, we are helping clients identify funds early in the life cycle. Investors no longer wait three years before buying an ETF, as used to occur with mutual funds.
Todd Rosenbluth is the director of ETF and mutual fund research at CFRA. Learn more about CFRA's ETF research here.
