Best And Worst Q1'16: Mid Cap Blend ETFs, Mutual Funds And Key Holdings

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Includes: DOX, LSIRX, RBMAX, RYJ, XMLV, ZAYO
by: David Trainer

Summary

The Mid Cap Blend style ranks sixth in Q1'16.

Based on an aggregation of ratings of 18 ETFs and 319 mutual funds.

XMLV 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 sixth out of the twelve fund styles as detailed in our Q1'16 Style Ratings for ETFs and Mutual Funds report. Last quarter, the Mid Cap Blend style ranked eighth. It gets our Neutral rating, which is based on aggregation of ratings of 18 ETFs and 319 mutual funds in the Mid Cap Blend style. See a recap of our Q4'15 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 19 to 3336). 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

Four ETFs 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

Five mutual funds are excluded from Figure 2 because their total net assets are below $100 million and do not meet our liquidity minimums.

The PowerShares S&P MidCap Low Volatility Portfolio (NYSE:XMLV) is the top-rated Mid Cap Blend ETF and the ClearBridge Mid Cap Fund (MUTF:LSIRX) is the top-rated Mid Cap Blend mutual fund. XMLV earns an Attractive rating and LSIRX earns a Very Attractive rating.

The Guggenheim Raymond James SB-1 Equity ETF (NYSE:RYJ) is the worst-rated Mid Cap Blend ETF and the RBC Mid Cap Value Fund (MUTF:RBMAX) is the worst-rated Mid Cap Blend mutual fund. RYJ earns a Neutral rating and RBMAX earns a Very Dangerous rating.

Amdocs (NYSE:DOX) remains one of our favorite stocks held by LSIRX and earns a Very Attractive rating. Since 1998, Amdocs has grown after-tax profit (NOPAT) by 16% compounded annually. The company has earned a double-digit return on invested capital (ROIC) every year for the past decade and currently earns a 12% ROIC. The impressive profit growth achieved by Amdocs has not gone unnoticed, as the stock is up 90% over the past five years. However, shares remain undervalued. At its current price of $55/share, Amdocs has a price-to-economic-book value (PEBV) ratio of 1.0. This ratio means the market expects Amdoc's NOPAT to never meaningfully grow from current levels. If Amdocs can grow NOPAT by just 6% compounded annually for the next decade, the stock is worth $72/share today - a 29% upside.

Zayo Group (NYSE:ZAYO) is one of our least favorite stocks held by Mid Cap Blend ETFs and mutual funds. Zayo earns a Dangerous rating. Since Zayo's IPO, the company's economic earnings have not only remained negative, but also declined from -$137 million in 2013 to -$165 million over the last twelve months. Over this same time, Zayo's ROIC has consistently ranked in the bottom quintile and is currently a bottom quintile 4%. Despite the deterioration of the business, ZAYO remains overvalued. To justify its current price of $24/share, Zayo must grow NOPAT by 13% compounded annually for the next 13 years. The expectations embedded in the stock price provide no room for error and only large downside risk.

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 Kyle Guske II receive no compensation to write about any specific stock, 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.