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The Consumer Staples sector ranks first out of the ten sectors as detailed in my Sector Rankings for ETFs and Mutual Funds report. It gets my Neutral rating, which is based on aggregation of ratings of 10 ETFs and nine mutual funds in the Consumer Staples sector as of January 15, 2014. Prior reports on the best & worst ETFs and mutual funds in every sector are here.

Figures 1 and 2 rank all eight ETFs and all 8 mutual funds in the sector that meet our liquidity standards. Not all Consumer Staples sector ETFs and mutual funds are created the same. The number of holdings varies widely from 20 to 118, which creates drastically different investment implications and ratings. The best ETFs and mutual funds allocate more value to Attractive-or-better-rated stocks than the worst ETFs and mutual funds, which allocate too much value to Neutral-or-worse-rated stocks.

To identify the best and avoid the worst ETFs and mutual funds within the Consumer Staples sector, investors need a predictive rating based on (1) stocks ratings of the holdings and (2) the all-in expenses of each ETF and mutual fund. Investors need not rely on backward-looking ratings. My fund rating methodology is detailed here.

Investors seeking exposure to the Consumers Staples sector should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2.

Get my ratings on all ETFs and mutual funds in this sector on my free mutual fund and ETF screener.

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

Fidelity MSCI Consumer Staples Index ETF (NYSEARCA:FSTA) is excluded from Figure 1 because its total net assets (NYSEARCA:TNA) are below $100 million and do not meet our liquidity standards.

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

ICON Funds: ICON Consumer Staples Fund (ICLEX) is excluded from Figure 2 because its total net assets are below $100 million and do not meet our liquidity standards.

State Street SPDR Consumer Staples Select Sector SPDR (NYSEARCA:XLP) is my top-rated Consumer Staples ETF and Vanguard World Funds: Vanguard Consumer Staples Index Fund (VCSAX) is my top-rated Consumer Staples mutual fund. Both earn my Attractive rating.

PowerShares S&P SmallCap Consumer Staples Portfolio (NASDAQ:PSCC) is my worst-rated Consumer Staples ETF and Fidelity Select Portfolios: Construction and Housing Portfolio (FSHOX) is my worst-rated Consumer Staples mutual fund. Both earn my Dangerous rating.

Figure 3 shows that 30 out of the 200 stocks (over 38% of the market value) in Consumer Staples ETFs and mutual funds get an Attractive-or-better rating. However, only 3 out of 10 Consumer Staples ETFs (less than 30% of total net assets) and 1 out of 9 Consumer Staples mutual funds (less than 11% of total net assets) get an Attractive-or-better rating.

The takeaways are: mutual fund managers allocate too much capital to low-quality stocks and Consumer Staples ETFs hold poor quality stocks.

Figure 3: Consumer Staples Sector Landscape For ETFs, Mutual Funds & Stocks

Sources: New Constructs, LLC and company filings

As detailed in "Cheap Funds Dupe Investors", the fund industry offers many cheap funds but very few funds with high-quality stocks, or with what I call good portfolio management.

Investors need to tread carefully when considering Consumer Staples ETFs and mutual funds, as only 3 ETFs and 1 mutual fund earn my Attractive-or-better rating. With so many Neutral or Dangerous rated funds, investors must choose wisely to avoid these. Only 3 ETFs and 1 Consumer Staples mutual fund in the Consumer Staples sector allocate enough value to Attractive-or-better-rated stocks to earn an Attractive rating.

Wal-Mart Stores, Inc. (NYSE:WMT) is one of my favorite stocks held by Consumer Staples ETFs and mutual funds and earns my Attractive rating. WMT has grown after-tax profits (NOPAT) by 11% compounded annually over the last 15 years. WMT currently earns a return on invested capital (ROIC) of 13%, and, as we highlighted in June, WMT has one of the most consistently high ROICs of any company we cover. The company has also generated positive and increasing economic earnings for the past 13 years. At the current valuation of ~$78, Wal-Mart has a price to economic book value ratio of 0.9, implying a permanent 10% decline in NOPAT. One must ignore Wal-Mart's proven track record of NOPAT growth to agree with this valuation.

Masco Corporation (NYSE:MAS) is one of my least favorite stocks held by Consumer Staples ETFs and mutual funds and earns my Dangerous rating. Over the past 15 years, MAS has actually had its NOPAT decline from ~$450 million in 1998 to ~$300 million last year. MAS currently earns a bottom quintile ROIC of 3%. Even worse, the company has not earned positive economic earnings in any year in our model. Despite its operational struggles, the recovering housing market has helped drive the valuation of MAS well beyond its fundamentals. To justify its current valuation of ~$23, MAS would need to grow NOPAT by 18% compounded annually for 15 years. Even with a recovering housing market, such optimistic profit growth expectations seem unwarranted.

119 stocks of the 3000+ I cover are classified as Consumer Staples stocks.

Figures 4 and 5 show the rating landscape of all Consumer Staples ETFs and mutual funds.

My Sector Rankings for ETFs and Mutual Funds report ranks all sectors and highlights those that offer the best investments.

Figure 4: Separating the Best ETFs From the Worst ETFs

Sources: New Constructs, LLC and company filings

Figure 5: Separating the Best Mutual Funds From the Worst Mutual Funds

Sources: New Constructs, LLC and company filings

Review my full list of ratings and rankings along with reports on all 10 ETFs and 9 mutual funds in the Consumer Staples sector.

Kyle Guske II contributed to this report.

Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, sector or theme.

Source: Best And Worst ETFs, Mutual Funds, And Key Holdings: Consumer Staples Sector