Best And Worst Consumer Discretionary ETFs, Mutual Funds, And Key Holdings

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Includes: F, ITB, PMR, RCD, RTH, TNA, VMC, XLY
by: David Trainer

Summary

Lists of the Best and Worst ETFs and Mutual Funds in the Consumer Discretionary Sector.

Distribution of all Consumer Discretionary Sector ETFs and Mutual Funds across our Predictive Rating Scale.

Ratings are based on rigorous analysis of the profitability and valuation of each fund's holdings.

Our rating system is forward-looking and does not rely on past performance.

The Consumer Discretionary sector ranks fourth out of the ten sectors as detailed in my Sector Rankings for ETFs and Mutual Funds report. It gets my Dangerous rating, which is based on aggregation of ratings of 18 ETFs and 21 mutual funds in the Consumer Discretionary sector as of April 2, 2014. Prior reports on the best & worst ETFs and mutual funds in every sector are here.

Figure 1 shows the five best and worst rated Consumer Discretionary ETFs and Figure 2 ranks from best to worst the five Consumer Discretionary mutual funds that meet our liquidity standards. Not all Consumer Discretionary sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 25 to 373), 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 Discretionary 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 should not buy any Consumer Discretionary ETFs or mutual funds because none get an Attractive-or-better rating. If you must have exposure to this sector, 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.

Get my ratings on all ETFs and mutual funds in this sector on my mutual fund and ETF screener. For more products, click here.

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

Guggenheim S&P Equal Weight Consumer Discretionary (NYSE:RCD), PowerShares Dynamic Retail (NYSE:PMR), and Market Vectors Retail ETF (NYSEARCA:RTH) are excluded from Figure 1 because their total net assets (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 Discretionary Fund (MUTF:ICCCX) 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 Discretionary Select Sector SPDR (NYSEARCA:XLY) is my top-rated Consumer Discretionary ETF and Fidelity Select Portfolios: Leisure Portfolio (MUTF:FDLSX) is my top-rated Consumer Discretionary mutual fund. Both earn my Neutral rating.

iShares U.S. Home Construction ETF (BATS:ITB) is my worst rated Consumer Discretionary ETF and Rydex Series Funds: Leisure Fund (MUTF:RYLSX) is my worst rated Consumer Discretionary mutual fund. Both earn my Dangerous rating.

Figure 3 shows that 58 out of the 459 stocks (over 18% of the market value) in Consumer Discretionary ETFs and mutual funds get an Attractive-or-better rating. However, 0 out of 18 Consumer Discretionary ETFs and 0 out of 21 Consumer Discretionary mutual funds get an Attractive-or-better rating.

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

Figure 3: Consumer Discretionary 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 Discretionary ETFs and mutual funds, as no ETFs and mutual funds in the Consumer Discretionary sector allocate enough value to Attractive-or-better-rated stocks to earn an Attractive rating. Investors would be better suited looking at individual stocks for exposure to the Consumer Discretionary sector.

Ford Motor Company (NYSE:F) is one of my favorite stocks held by XLY and earns my Attractive rating. Since 2007, when the automobile industry was crumbling, F has grown after-tax profit (NOPAT) by an astounding 42% compounded annually. In addition, they have increased their return on invested capital (ROIC) to 9% from 1% in 2007. With the recent recalls of numerous GM models, F could stand to take larger market share and continue this growth. However, the market has failed to see any profit growth potential in F. At the current price of ~$16/share, F has a price to economic book value (PEBV) ratio of just 0.9. This ratio implies that the market expects F's NOPAT to permanently decline by 10%. While F may not continue to grow profits as fast as it has recently, it should easily surpass the market's low expectations for permanent profit decline. Investors should buy F before the market realizes the true value of this automaker.

Vulcan Materials Company (NYSE:VMC) is one of my least favorite stocks held by PKB and earns my Dangerous rating. Over the past decade, VMC hasn't grown NOPAT at all, but rather has seen NOPAT decline by 6% compounded annually. The company's ROIC has decreased to a bottom-quintile 2%. Additionally, VMC has generated negative economic earnings in all but two of the last 10 years. Despite these operational struggles, VMC remains overvalued. To justify its current price of ~$66/share, VMC would have to grow NOPAT by 11% compounded annually for 37 years. Given the recent growth, or rather lack of, this expectation seems highly unlikely and investors should avoid VMC.

445 stocks of the 3000+ I cover are classified as Consumer Discretionary stocks.

Figures 4 and 5 show the rating landscape of all Consumer Discretionary 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 18 ETFs and 21 mutual funds in the Consumer Discretionary 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.

Disclosure: I 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.