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The mid-cap blend style ranks eighth out of the twelve fund styles as detailed in my style roadmap. It gets my Dangerous rating, which is based on aggregation of ratings of 20 ETFs and 270 mutual funds in the mid-cap blend style as of May 1,2012.

Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the style. 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.

Investors should use 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 should not buy any mid-cap blend ETFs or mutual funds because none get an Attractive-or-better rating. If you must have exposure to this style, you should buy a basket of Attractive-or-better rated stocks and avoid paying undeserved fund fees. Active management has a long history of not paying off.

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

* Best ETFs exclude ETFs with less NAV's less than 100 million.

Sources: New Constructs, LLC and company filings

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

* Best mutual funds exclude funds with NAV's less than 100 million.

Sources: New Constructs, LLC and company filings

Vanguard Mid-Cap ETF (NYSEARCA:VO) is my top-rated mid-cap blend ETF and Westport Funds: Westport Select Cap Fund (MUTF:WPSCX) is my top-rated mid-cap blend mutual fund. Both earn my Neutral rating.

SPDR DJ Wilshire Mid Cap ETF (EMM) is my worst-rated mid-cap blend ETF and earns my Dangerous rating. Lord Abbett Securities Trust: Lord Abbett Value Opportunities Fund (MUTF:LVOAX) is my worst-rated mid-cap blend mutual fund and earns my Most Dangerous rating.

Figure 3 shows that 467 out of the 2523 stocks (over 26% of the total net assets) held by mid-cap blend ETFs and mutual funds get an Attractive-or-better rating. However, none of the 20 mid-cap blend ETFs and none of the 270 mid-cap blend mutual funds get an Attractive-or-better rating.

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

Figure 3: Mid-cap Blend Style 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 mid-cap blend ETFs and mutual funds, as none of the ETFs or mutual funds in the mid-cap blend style allocate enough value to Attractive-or-better-rated stocks to earn an Attractive rating. Focus on individual stocks instead.

ITT Educational Services Inc. (NYSE:ESI) is one of my favorite stocks held by mid-cap blend ETFs and mutual funds and earns my Very Attractive rating. ESI has a strong, consistent business model, generating a return on invested capital (NASDAQ:ROIC) of 155% last year and has maintained an ROIC above 144% for the last 8 years. ESI's current stock price of $66.02 implies that the company's cash flows will permanently drop by 70%, a rather unlikely decline for a company with a history of stable profits.

Rowan Companies, Inc. (NYSE:RDC) is one of my least favorite stocks held by mid-cap blend ETFs and mutual funds and earns my Very Dangerous rating. RDC has misleading earnings, which means that it's reported earnings are positive and rising while its economic earnings are negative and declining. RDC's 1% ROIC is in the bottom quintile of Russell 3000 companies.

Figures 4 and 5 show the rating landscape of all mid-cap blend ETFs and mutual funds.

Figure 4: Separating the Best ETFs From the Worst Funds

Sources: New Constructs, LLC and company filings

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

Sources: New Constructs, LLC and company filings

Review my full list of ratings and rankings along with free reports on all 20 ETFs and 270 mutual funds in the mid-cap blend style on my website.

Disclosure: I own ESI. I receive no compensation to write about any specific stock, sector, style or theme.

Source: Best & Worst ETFs And Mutual Funds: Mid-Cap Blend