At the beginning of the second quarter of 2019, the Financials, Consumer Non-cyclicals, and Telecom Services sectors earn Attractive-or-better ratings. Our sector ratings are based on the normalized aggregation of our stock ratings for every stock in each sector. Our stock ratings are based on five criteria that assess a firm's business strength and valuation. See last quarter's Sector Ratings here.
Investors looking for sector funds that hold quality stocks should look no further than the Financials and Consumer Non-cyclicals sectors. These sectors house the highest rated funds. Figures 4 through 7 provide more details. The primary driver behind an Attractive fund rating is good portfolio management, or good stock picking, with low total annual costs.
Attractive-or-better ratings do not always correlate with Attractive-or-better total annual costs. This fact underscores that (1) cheap funds can dupe investors and (2) investors should invest only in funds with good stocks and low fees.
See Figures 4 through 13 for a detailed breakdown of ratings distributions by sector.
Figure 1: Ratings for All Sectors
To earn an Attractive-or-better Predictive Rating, an ETF or mutual fund must have high-quality holdings and low costs. Only the top 30% of all ETFs and mutual funds earn our Attractive or better ratings.
First Trust NASDAQ Bank ETF (FTXO) is the top rated Financials fund. It gets our Very Attractive rating by allocating over 40% of its value to Attractive-or-better-rated stocks.
Rydex Real Estate Fund (RYREX) is the worst Real Estate fund. It gets our Very Unattractive rating by allocating over 71% of its value to Unattractive-or-worse-rated stocks. Making matters worse, it charges investors annual costs of 8.39%.
Figure 2 shows the distribution of our Predictive Ratings for all sector ETFs and mutual funds.
Figure 2: Distribution of ETFs & Mutual Funds (Assets and Count) by Predictive Rating
Figure 3 offers additional details on the quality of the sector funds. Note that the average total annual cost of Very Unattractive funds is over six times that of Very Attractive funds.
Figure 3: Predictive Rating Distribution Stats
Source: New Constructs, LLC and company filings
This table shows that only the best of the best funds get our Very Attractive Rating: they must hold good stocks AND have low costs. Investors deserve to have the best of both and we are here to give it to them.
Ratings by Sector
Figure 4 presents a mapping of Very Attractive funds by sector. The chart shows the number of Very Attractive funds in each sector and the percentage of assets in each sector allocated Very Attractive-rated funds.
Figure 4: Very Attractive ETFs & Mutual Funds by Sector
Figure 5 presents the data charted in Figure 4.
Figure 5: Very Attractive ETFs & Mutual Funds by Sector
Figure 6 presents a mapping of Attractive funds by sector. The chart shows the number of Attractive funds in each sector and the percentage of assets in each sector allocated to Attractive-rated funds.
Figure 6: Attractive ETFs & Mutual Funds by Sector
Figure 7 presents the data charted in Figure 6.
Figure 7: Attractive ETFs & Mutual Funds by Sector
Figure 8 presents a mapping of Neutral funds by sector. The chart shows the number of Neutral funds in each sector and the percentage of assets in each sector allocated to Neutral-rated funds.
Figure 8: Neutral ETFs & Mutual Funds by Sector
Figure 9 presents the data charted in Figure 8.
Figure 9: Neutral ETFs & Mutual Funds by Sector
Figure 10 presents a mapping of Unattractive funds by sector. The chart shows the number of Unattractive funds in each sector and the percentage of assets in each sector allocated to Unattractive-rated funds.
The landscape of sector ETFs and mutual funds is littered with Unattractive funds. Investors in Basic Materials have put over 80% of their assets in Unattractive-rated funds.
Figure 10: Unattractive ETFs & Mutual Funds by Sector
Figure 11 presents the data charted in Figure 10.
Figure 11: Unattractive ETFs & Mutual Funds by Sector
Figure 12 presents a mapping of Very Unattractive funds by sector. The chart shows the number of Very Unattractive funds in each sector and the percentage of assets in each sector allocated to Very Unattractive-rated funds.
Figure 12: Very Unattractive ETFs & Mutual Funds by Sector
Figure 13 presents the data charted in Figure 12.
Figure 13: Very Unattractive ETFs & Mutual Funds by Sector
This article originally published on April 10, 2019.
Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, sector or theme.
Harvard Business School features the powerful impact of our research automation technology in the case New Constructs: Disrupting Fundamental Analysis with Robo-Analysts.
Ernst & Young's recent white paper "Getting ROIC Right" proves the superiority of our holdings research and analytics.
Get our long and short/warning ideas. Access to top accounting and finance experts.
1. Daily - long & short idea updates, forensic accounting insights, chat
2. Weekly - exclusive access to in-depth long & short ideas
3. Monthly - 40 large, 40 small cap ideas from the Most Attractive & Most Dangerous Stocks Model Portfolios
Both Ernst & Young and Harvard Business School demonstrate the superiority of our research in recent white papers.
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.