Best & Worst ETFs & Mutual Funds By Style

best and worstDavid Trainer:  This report identifies the “best” ETFs and mutual funds based on the quality of their holdings and their costs. As detailed in “Low-Cost Funds Dupe Investors”, there are few funds that have both good holdings and low costs. While there are lots of cheap funds, there are very few with high-quality holdings.

Without speculating on the cause for this disconnect, I think it is fair to say that there is a severe lack of quality research into the holdings of mutual funds and ETFs. There should not be such a large gap between the quality of research on stocks and funds, which are simply groups of stocks.

After all, investors should care more about the quality of a fund’s holdings than its costs because the quality of a fund’s holdings is the single most important factor in determining its future performance.

My Predictive Rating system rates 7400+ mutual funds and ETFs according to the quality of their holdings (portfolio management rating) and their costs (total annual costs rating).

The following is a summary of my top picks and pans for all style ETFs and mutual funds. I will follow this summary with a detailed report on each style, just as I did for each sector.

Figure 1 shows the best ETF or mutual fund in each investment style as of January 23, 2014. Investors should focus on all cap value, large cap value, and large cap blend funds as only those styles contain Attractive funds.

For a full list of all ETFs and mutual funds for each investment style ranked from best to worst, see our free ETF and mutual fund screener.

Figure 1: Best ETFs and Mutual Funds In Each Style

Screen shot 2014-01-30 at 10.22.40 AM

Source: New Constructs, LLC and company filings

First Trust First Trust Capital Strength ETF (NYSEARCA:FTCS) is my top rated large cap value fund and the number one rated ETF out of all style ETFs and mutual funds I cover. FTCS allocates over 36% of its assets to Attractive-or-better rated stocks. Its total annual costs are 0.72%

Reynolds American, Inc. (RAI) is one of my favorite stocks held by FTCS and earns my Attractive rating. At 11% compounded annually over the past 13 years, RAI’s consistent growth in after tax profit (NOPAT) is impressive. Over the same time, the company has increased their return on invested capital (ROIC) from ~3% to over 9%. RAI has also generated positive and increasing economic earnings since 2005. One might expect a growing company such as RAI to command a high valuation, but that’s not the case here. At its current valuation of ~$49/share, RAI has a price to economic book value (PEBV) ratio of 1.0. This ratio implies that the market expects NOPAT to remain the same or never grow for the remainder of its corporate life. The combination of solid growth and a cheap valuation makes RAI an Attractive stock.

Figure 2 shows the worst ETF or mutual fund for each investment style as of January 23, 2014. Every style has Very Dangerous funds that can hurt investors.

(...)Click here to continue reading the original article: Best & Worst ETFs & Mutual Funds By Style [First Trust Strateg Val Idx Fnd (ETF), Cimarex Energy Co]

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