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How To Avoid The Worst Style ETFs Q1'21

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David Trainer's Blog
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Long/Short Equity, Value, Deep Value, Long-Term Horizon

Seeking Alpha Analyst Since 2010

We aim to help investor make more intelligent capital allocation decisions. Our research is driven by proven-superior fundamental data, models and equity/credit ratings.

Question: Why are there so many ETFs?

Answer: ETF providers tend to make lots of money on each ETF so they create more products to sell.

The large number of ETFs has little to do with serving your best interests. The best fundamental data in the world, proven in The Journal of Financial Economics, drives our research and analysis of ETF holdings. We leverage this data to identify three red flags you can use to avoid the worst ETFs:

1. Inadequate Liquidity

This issue is the easiest issue to avoid, and our advice is simple. Avoid all ETFs with less than $100 million in assets. Low levels of liquidity can lead to a discrepancy between the price of the ETF and the underlying value of the securities it holds. Plus, low asset levels tend to mean lower volume in the ETF and larger bid-ask spreads.

2. High Fees

ETFs should be cheap, but not all of them are. The first step here is to know what is cheap and expensive.

To ensure you are paying at or below average fees, invest only in ETFs with total annual costs below 0.41%, which is the average total annual cost of the 721 U.S. equity Style ETFs we cover. The weighted average is lower at 0.13%, which highlights how investors tend to put their money in mutual funds with low fees.

Figure 1 shows WBI BullBear Value 3000 ETF (WBIF) is the most expensive style ETF and JPMorgan BetaBuilders U.S. Equity ETF (BBUS) is the least expensive. Absolute Shares Trust (WBIF, WBIE, WBIL, WBIG) provides 4 of the most expensive ETFs while JP Morgan provides the cheapest (BBUS).

Figure 1: 5 Most and Least Expensive Style ETFs

Sources: New Constructs, LLC and company filings

Investors need not pay high fees for quality holdings.[1] State Street SPDR Portfolio S&P 1500 Composite (SPTM) is the best ranked style ETF in Figure 1. SPTM’s Neutral Portfolio Management rating and 0.03% total annual cost earns it an Attractive rating.[2] American Century STOXX U.S. Quality Value ETF (VALQ) is the best ranked style ETF overall. VALQ’s Attractive Portfolio Management rating and 0.32% total annual cost also earns it a Very Attractive rating.

On the other hand, no matter how cheap an ETF, if it holds bad stocks, its performance will be bad. The quality of an ETF’s holdings matters more than its price.

3. Poor Holdings

Avoiding poor holdings is by far the hardest part of avoiding bad ETFs, but it is also the most important because an ETFs performance is determined more by its holdings than its costs. Figure 2 shows the ETFs within each style with the worst holdings or portfolio management ratings.

Figure 2: Style ETFs with the Worst Holdings

Sources: New Constructs, LLC and company filings

iShares (MTUM & IWS), State Street (SMLV & SPYD), and Schwab (SCHA & SCHM) appear more often than any other providers in Figure 2, which means that they offer the most ETFs with the worst holdings.

MFAM Small Cap Growth ETF (MFMS) is the worst rated ETF in Figure 2. ETF Managers ETFMG Alternative Harvest ETF (MJ) also earns a Very Unattractive predictive overall rating, which means not only does it hold poor stocks, it charges high total annual costs.

Our overall ratings on ETFs are on our stock ratings of their holdings and the total annual costs of investing in the ETF.

The Danger Within

Buying an ETF without analyzing its holdings is like buying a stock without analyzing its business and finances. Put another way, research on ETF holdings is necessary due diligence because an ETF’s performance is only as good as its holdings’ performance. Don’t just take our word for it, see what Barron’s says on this matter.


Analyzing each holding within funds is no small task. OurRobo-Analyst technology enables us to perform this diligence with scale and provide the research needed to fulfill the fiduciary duty of care. More of the biggest names in the financial industry (see At BlackRock, Machines Are Rising Over Managers to Pick Stocks) are now embracing technology to leverage machines in the investment research process. Technology may be the only solution to the dual mandate for research: cut costs and fulfill the fiduciary duty of care. Investors, clients, advisors and analysts deserve the latest in technology to get the diligence required to make prudent investment decisions.

This article originally published on January 29, 2021.

Disclosure: David Trainer, Kyle Guske II, Alex Sword, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.

[1] Three independent studies from respected institutions prove the superiority of our data, models, and ratings. Learn more here.

[2] Harvard Business School features the powerful impact of our research automation technology in the case New Constructs: Disrupting Fundamental Analysis with Robo-Analysts.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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