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 60 different All Cap Blend ETFs and at least 281 ETFs across all investment styles. Do investors need 23+ choices on average per style? How different can the ETFs be?
Those 60 All Cap Blend ETFs are very different. With anywhere from 29 to 3792 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 Value ranks first for stock selection. Small Cap Blend ranks last. Details on the Best & Worst ETFs in each style are here.
A Recipe for Paralysis By Analysis
We firmly believe ETFs for a given style should not all be that different. 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 3792 stocks, and sometimes even more, for one ETF.
Any investor worth his salt 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. Note there are no All Cap Growth or All Cap Value ETFs under coverage.
Figure 1: The Best ETF in Each Style
Sources: New Constructs, LLC and company filings
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 my word for it, see what Barron’s says on this matter.
PERFORMANCE OF ETF’S HOLDINGS = PERFORMANCE OF ETF
If Only Investors Could Find Funds Rated by Their Holdings
New Constructs covers over 3000 stocks and is known for the due diligence we do for each stock we cover. Accordingly, our coverage of ETFs leverages the diligence we do on each stock by rating ETFs based on the aggregated ratings of the stocks each ETF holds.
ValueShares US Quantitative Value ETF (QVAL) is the top-rated All Cap Blend ETF and the overall best ETF of the 281 style ETFs that we cover.
The worst ETF in Figure 1 is State Street SPDR S&P Small Cap Growth ETF (SLYG), which gets a Neutral rating. One would think ETF providers could do better for this style.
Disclosure: David Trainer and Blaine Skaggs receive no compensation to write about any specific stock, style, or theme.
Photo Credit: Chris Beckett (Flickr)