How To Find The Best Style ETFs: Q4'16

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Includes: FDM, QVAL, QVM, RDVY
by: David Trainer

Summary

The large number of ETFs hurts investors more than it helps as too many options become paralyzing.

Performance of an ETFs holdings are equal to the performance of an ETF.

Our coverage of ETFs leverages the diligence we do on each stock by rating ETFs based on the aggregated ratings of their holdings.

Finding the best ETFs is an increasingly difficult task in a world with so many to choose from. How can you pick with so many choices available?

Don't Trust ETF Labels

There are at least 80 different All Cap Blend ETFs and at least 291 ETFs across twelve styles. Do investors need 24+ choices on average per style? How different can the ETFs be?

Those 80 All Cap Blend ETFs are very different. With anywhere from 21 to 3723 holdings, many of these All Cap Blend ETFs have drastically different portfolios, creating drastically different investment implications.

The same is true for the ETFs in any other style, as each offers a very different mix of good and bad stocks. Large Cap Blend funds rank first for stock selection. Small Cap Value funds rank last. Details on the Best & Worst ETFs in each style are here.

A Recipe for Paralysis By Analysis

We think the large number of All Cap Blend (or any other) style ETFs hurts investors more than it helps because too many options can be paralyzing. It is simply not possible for the majority of investors to properly assess the quality of so many ETFs. Analyzing ETFs, done with the proper diligence, is far more difficult than analyzing stocks because it means analyzing all the stocks within each ETF. As stated above, that can be as many as 3723 stocks, and sometimes even more, for one ETF.

Any investor focused on fulfilling fiduciary duties recognizes that analyzing the holdings of an ETF is critical to finding the best ETF. Figure 1 shows our top rated ETF for each style.

Figure 1: The Best ETF in Each Style

Sources: New Constructs, LLC and company filings

Amongst the ETFs in Figure 1, the Arrow QVM Equity Factor ETF (NYSEARCA:QVM) ranks first overall, the ValueShares US Quantitative Value ETF (BATS:QVAL) ranks second, and the First Trust NASDAQ Rising Dividend Achievers ETF (NASDAQ:RDVY) ranks third. The First Trust Dow Jones Select Micro Cap Index Fund (NYSEARCA:FDM) ranks last.

How to Avoid "The Danger Within"

Why do you need to know the holdings of ETFs before you buy?

You need to be sure you do not buy an ETF that might blow up. Buying an ETF without analyzing its holdings is like buying a stock without analyzing its business and finances. No matter how cheap, if it holds bad stocks, the ETF's performance will be bad. Don't just take our word for it, see what Barron's says on this matter.

PERFORMANCE OF FUND'S HOLDINGS = PERFORMANCE OF FUND

If Only Investors Could Find Funds Rated by Their Holdings

Our ETF ratings leverage our stock coverage. We rate ETFs based on the aggregated ratings of the stocks each ETF holds.

The Arrow QVM Equity Factor ETF is not only the top-rated All Cap Growth ETF, but is also the best style ETF out of the 291 style ETFs that we cover.

The ETFs in Figure 1 all receive an Attractive-or-better rating. However, with so few assets in some of the funds, it is clear investors haven't identified these quality ETFs.

This article originally published here on November 11, 2016.

Disclosure: David Trainer, Kyle Guske and Kyle Martone 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.

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