Best And Worst Q1'16: Financials ETFs, Mutual Funds And Key Holdings

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Includes: DVFYX, IAK, KBWY, PGR, PLD, RYREX
by: David Trainer

Summary

The Financials sector ranks seventh in Q1'16.

Based on an aggregation of ratings of 41 ETFs and 244 mutual funds.

IAK is our top-rated Financials ETF and DVFYX is our top-rated Financials mutual fund.

The Financials sector ranks seventh out of the ten sectors as detailed in our Q1'16 Sector Ratings for ETFs and Mutual Funds report. Last quarter, the Financials sector ranked sixth. It gets our Dangerous rating, which is based on an aggregation of ratings of 41 ETFs and 244 mutual funds in the Financials sector. See a recap of our Q4'15 Sector Ratings here.

Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the sector. Not all Financials sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 22 to 572). This variation creates drastically different investment implications and, therefore, ratings.

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

Figure 1: ETFs with the Best & Worst Ratings - Top 5

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* Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity.

Sources: New Constructs, LLC and company filings

Four ETFs are excluded from Figure 1 because their total net assets are below $100 million and do not meet our liquidity minimums. See our ETF screener for more details.

Figure 2: Mutual Funds with the Best & Worst Ratings - Top 5

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* Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity.

Sources: New Constructs, LLC and company filings

The iShares US Insurance ETF (NYSEARCA:IAK) is the top-rated Financials ETF and the Davis Financial Fund (MUTF:DVFYX) is the top-rated Financials mutual fund. Both earn a Very Attractive rating.

The PowerShares KBW Premium Yield Equity REIT Portfolio ETF (NASDAQ:KBWY) is the worst-rated Financials ETF and the Rydex Series Real Estate Fund (MUTF:RYREX) is the worst-rated Financials mutual fund. Both earn a Very Dangerous rating.

602 stocks of the 3000+ we cover are classified as Financials stocks.

The Progressive Corp (NYSE:PGR) is one of our favorite stocks held by IAK and earns a Very Attractive rating. PGR also lands on January's Most Attractive Stocks list. Since 2009, Progressive has grown after-tax profit (NOPAT) by 5% compounded annually. Over this same time frame, Progressive's return on invested capital (ROIC) never fell below 17% and is currently a top quintile 19%. The strength in Progressive's business helps explain why the stock was up over 17% in 2015, but even after this price increase shares remain undervalued. At its current price of $31/share, Progressive has a price to economic book value (PEBV) ratio of 1.0. This ratio means that the market expects Progressive's NOPAT to never meaningfully grow from its current levels. If Progressive can grow NOPAT by just 5% compounded annually (similar to past five years) for the next five years, the stock is worth $39/share today - a 26% upside.

Prologis (NYSE:PLD) is one of our least favorite stocks held by RYREX and earns a Dangerous rating. On the surface, Prologis would appear to be a healthy business that has grown GAAP net income by 181% compounded annually since 2010. However, this net income growth fails to account for the expansion of the balance sheet to fund the GAAP growth. In fact, Prologis' debt has increased from $3.6 billion to $10.4 billion since 2010 and in total, Prologis' invested capital has grown from $7 billion to $25 billion over the past five years. Increasing invested capital does not come free of charge and after removing the cost for Prologis' invested capital we find that Prologis has only earned positive economic earnings in one of the past 17 years (2005). Despite its long-term track record of value destruction, PLD is priced for significant profit growth going forward. To justify its current price of $41/share, PLD must grow NOPAT by 10% compounded annually for the next 12 years. This expectation seems highly optimistic given PLD's history of value destruction.

Figures 3 and 4 show the rating landscape of all Financials ETFs and mutual funds.

Figure 3: Separating the Best ETFs From the Worst ETFs

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Sources: New Constructs, LLC and company filings

Figure 4: Separating the Best Mutual Funds From the Worst Mutual Funds

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Sources: New Constructs, LLC and company filings

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

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.