Best And Worst Q3'15: Mid Cap Blend ETFs, Mutual Funds And Key Holdings

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Includes: CZA, DWA, GT, LSIRX, RSCO, SATDX
by: David Trainer

Summary

Mid Cap Blend style ranks ninth in Q3'15.

Based on an aggregation of ratings of 19 ETFs and 332 mutual funds.

CZA is our top-rated Mid Cap Blend ETF and LSIRX is our top-rated Mid Cap Blend mutual fund.

The Mid Cap Blend style ranks ninth out of the 12 fund styles as detailed in our Q3'15 Style Ratings for ETFs and Mutual Funds report. It gets our Dangerous rating, which is based on an aggregation of ratings of 19 ETFs and 332 mutual funds in the Mid Cap Blend style. See a recap of our Q2'15 Style Ratings here.

Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the style. Not all Mid Cap Blend style ETFs and mutual funds are created the same. The number of holdings varies widely (from 20 to 3281). This variation creates drastically different investment implications and, therefore, ratings.

Investors seeking exposure to the Mid Cap Blend style 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

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

Sources: New Constructs, LLC and company filings

The Proshares S&P MidCap 400 Dividend Aristocrats ETF (NYSEARCA:REGL) and the Validea Market Legends ETF (NASDAQ:VALX) are excluded from Figure 1 because their total net assets are below $100 million and do not meet our liquidity minimums.

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

The Boson Trust Midcap Fund (MUTF:BTMFX) and the Johnson Opportunity Fund (MUTF:JOPPX) are excluded from Figure 2 because their total net assets are below $100 million and do not meet our liquidity minimums.

The Guggenheim Mid-Cap Core ETF (NYSE:CZA) is the top-rated Mid Cap Blend ETF and the Legg Mason ClearBridge Mid Cap Core Fund (MUTF:LSIRX) is the top-rated Mid Cap Blend mutual fund. CZA earns an Attractive rating and LSIRX earns a Very Attractive rating.

The State Street Russell Small Cap Completeness ETF (NYSEARCA:RSCO) is the worst-rated Mid Cap Blend ETF and the Satuit Capital US SMID Cap Fund (MUTF:SATDX) is the worst-rated Mid Cap Blend mutual fund. RSCO earns a Dangerous rating and SATDX earns a Very Dangerous rating.

The Goodyear Tire & Rubber Company (NYSE:GT) is one of our favorite stocks held by Mid Cap Blend funds and earns our Attractive rating. Since 2009, the company has grown after-tax profit (NOPAT) by 24% compounded annually. Goodyear currently earns a return on invested capital (ROIC) of 9%, which is triple the 3% earned in 2009. On a trailing-twelve month basis, Goodyear has generated over $2.6 billion in free cash flow which results in an impressive 16% FCF yield. At the current price of $30/share, Goodyear Tire has a price to economic book value (PEBV) ratio of 0.6. This ratio implies that the market expects Goodyear's profits to permanently decline by 40%. The ratio also tells us that the no-growth, or economic book value of GT is $46/share - a 53% upside.

DreamWorks Animation (NASDAQ:DWA), a prior Danger Zone stock, is one of our least favorite stocks held by Mid Cap Blend funds and earns our Dangerous rating. Since 2010, NOPAT has plummeted from $104 million to -$13 million as creating movies became more costly and less profitable. DreamWorks currently earns a bottom-quintile ROIC of 1%, which is a fraction of the 19% earned in 2009. Despite the deterioration of DreamWorks' business strength, the stock remains overvalued. To justify the current price of $19/share, DreamWorks must immediately achieve pre-tax (NOPBT) margins of 10% (similar to 2013 margin versus -2.5% in 2014) and grow revenue by 20% compounded annually for the next eight years. We feel the expectations embedded in DWA are highly optimistic given that, in addition to the issues raised above, revenue has declined in each of the last four years.

Figures 3 and 4 show the rating landscape of all Mid Cap Blend ETFs and mutual funds.

Figure 3: Separating the Best ETFs From the Worst Funds

Sources: New Constructs, LLC and company filings

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

Sources: New Constructs, LLC and company filings

Disclosure: David Trainer and Max Lee receive no compensation to write about any specific stock, style, style 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.