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David Trainer
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Follow me on Twitter: @NewConstructs David is CEO of New Constructs (, an independent research firm that leverages proprietary technology to find key insights from the Financial Footnotes of 10Ks and 10Qs. Having analyzed over 70,000 annual reports and their Financial... More
My company:
New Constructs
My blog:
The Diligence Institute
My book:
The Valuation Handbook
  • Predictive ETF Ratings: Real Diligence, Real Research 0 comments
    Oct 26, 2012 11:16 AM

    QUESTION: Why should ETF investors rely on backward-looking price trends as the primary source of research?

    ANSWER: They should not.

    QUESTION: Why has the traditional, backward-looking ETF research dominated the dialogue on ETF research for so long?

    ANSWER: There are almost no other alternatives to backward-looking research.

    QUESTION: How exactly should ETF research change to be more like stock research?

    ANSWER: An ETF is only as good as the stocks it holds. No matter how low the fees, an ETF with bad stocks will perform badly.

    "Research on holdings is necessary due diligence because an ETF's performance is only as good as its holdings' performance. No matter how cheap, if it holds bad stocks, the ETF's performance will be bad." Source: How To Find the Best ETFs


    There are two dri­vers of future fund performance:

    1. Stock-picking (Portfolio Management Rating) and
    2. Fund expenses (Total Annual Costs Rating)

    Our Predictive Fund Rating is based on these drivers.

    We analyze every fund holding based on New Constructs' stock ratings, which are reg­u­larly fea­tured as among the best by Barron's. Next, we measure and rank the all-in costs of investing in a fund (Total Annual Costs Rating).

    Our free mutual fund & ETF screener provides ratings and reports on 7400+ funds updated daily.

    Figure 1 details the criteria that drive our Predictive Rating system for funds. The two drivers of our predictive fund rating system are Portfolio Management and Total Annual Costs. The Portfolio Management Rating (details here) is the same as our Stock Rating (details here) except that we incorporate Asset Allocation (details here) in the Portfolio Management Rating. The Total Annual Costs Rating (details here) captures the all-in cost of being in a fund over a 3-yr holding period, the average holding period of all mutual fund investors.

    Figure 1 - Predictive Fund Rating Criteria and Thresholds for US Equity Funds

    (click to enlarge)Source: New Constructs, LLC

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