February 1, 2017

Sector Ratings For ETFs & Mutual Funds: 1Q17

by New Constructs

At the beginning of the first quarter of 2017, only the Consumer Staples sector earns an Attractive-or-better rating. Our sector ratings are based on the aggregation of our fund ratings for every ETF and mutual fund in each sector. See last quarter’s Sector Ratings here.

Investors looking for sector funds that hold quality stocks should look no further than the Consumer Staples sector. This sector houses 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. See our ETF & mutual fund screener for rankings, ratings and reports on 7000+ mutual funds and 400+ ETFs. Our fund rating methodology is detailed here.

All of our reports on the best & worst ETFs and mutual funds in every sector are available here.

Figure 1. Ratings For All Sectors

newconstructs_sectorratings1q17_fig1

Source: New Constructs, LLC and company filings

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.

Vanguard Consumer Staples Index Fund (VCSAX) is the top rated Consumer Staples fund. It gets our Very Attractive rating by allocating over 56% of its value to Attractive-or-better-rated stocks.

The Coca-Cola Company (KO: $42/share) is one of our favorite stocks held by VCSAX and earns an Attractive rating. Over the past decade, Coca-Cola has grown after-tax profit (NOPAT) by 4% compounded annually. The company has earned a double-digit return on invested capital (ROIC) in every year of our model (which dates back to 1998) and currently earns a 12% ROIC. Further showcasing the strength of KO’s business, it has generated a cumulative $32.9 billion in free cash flow (FCF) over the past five years. Despite the fundamental strength of Coca-Cola, the stock remains undervalued. At its current price of $42/share, KO has a price-to-economic book value (PEBV) ratio of 0.9. This ratio means the market expects KO’s NOPAT to permanently decline by 10%. If KO can maintain 2015 NOPAT margins (18%) and grow NOPAT by 3% compounded annually for the next decade, the stock is worth $52/share today – a 24% upside.

Columbia Global Energy & Natural Resources Fund (CNRRX) is the worst rated Energy fund. It gets our Very Dangerous rating by allocating over 57% of its value to Dangerous-or-worse-rated stocks. Making matters worse, it charges investors annual costs of 1.08%.

Golar LNG (GLNG: $23/share) is one of our least favorite stocks held by Energy ETFs and mutual funds and earns a Dangerous rating. Golar’s NOPAT has fallen from $83 million in 2005 to -$107 million over the last twelve months (TTM), while its NOPAT margin fell from 48% to -105% over the same time. The company’s ROIC has followed a similar trend and has declined from 4% in 2005 to a bottom-quintile -3% TTM. Despite the deterioration in business fundamentals, GLNG remains priced for significant profit growth. To justify its current price of $23/share, GLNG must immediately achieve 16% pre-tax margins (average of last 10 years vs. -106% TTM) and grow revenue by 30% compounded annually for the next 14 years. This scenario seems overly optimistic given Golar’s inability to grow profits over the past decade.

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

newconstructssectorratings1q17_ratingdistribution_fig2

Source: New Constructs, LLC and company filings

Figure 3 offers additional details on the quality of the sector funds. Note that the average total annual cost of Very Dangerous funds is over 11 times that of Very Attractive funds.

Figure 3. Predictive Rating Distribution Stats

newconstructssectorratings1q17_ratingdistributionstats_fig3

* Avg TAC = Weighted Average Total Annual Costs

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 to funds that are rated Very Attractive.

Figure 4. Very Attractive ETFs & Mutual Funds by Sector

newconstructs_sectorratings1q17_veryattractive_fig4

Source: New Constructs, LLC and company filings

Figure 5 presents the data charted in Figure 4.

Figure 5. Very Attractive ETFs & Mutual Funds by Sector

newconstructs_sectorratings1q17_veryattractivestats_fig5

Source: New Constructs, LLC and company filings

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 allocated to Attractive-rated funds in each sector.

Figure 6. Attractive ETFs & Mutual Funds by Sector

newconstructs_sectorratings1q17_attractive_fig6

Source: New Constructs, LLC and company filings

Figure 7 presents the data charted in Figure 6.

Figure 7. Attractive ETFs & Mutual Funds by Sector

newconstructs_sectorratings1q17_attractivestats_fig7

Source: New Constructs, LLC and company filings

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 allocated to Neutral-rated funds in each sector.

Figure 8. Neutral ETFs & Mutual Funds by Sector

newconstructs_sectorratings1q17_neutral_fig8

Source: New Constructs, LLC and company filings

Figure 9 presents the data charted in Figure 8.

Figure 9. Neutral ETFs & Mutual Funds by Sector

newconstructs_sectorratings1q17_neutralstats_fig9

Source: New Constructs, LLC and company filings

Figure 10 presents a mapping of Dangerous funds by fund sector. The chart shows the number of Dangerous funds in each sector and the percentage of assets allocated to Dangerous-rated funds in each sector.

The landscape of sector ETFs and mutual funds is littered with Dangerous funds. Investors in Telecom funds have put over 64% of their assets in Dangerous-rated funds.

Figure 10. Dangerous ETFs & Mutual Funds by Sector

newconstructs_sectorratings1q17_dangerous_fig10

Source: New Constructs, LLC and company filings

Figure 11 presents the data charted in Figure 10.

Figure 11. Dangerous ETFs & Mutual Funds by Sector

newconstructs_sectorratings1q17_dangerousstats_fig11

Source: New Constructs, LLC and company filings

Figure 12 presents a mapping of Very Dangerous funds by fund sector. The chart shows the number of Very Dangerous funds in each sector and the percentage of assets in each sector allocated to funds that are rated Very Dangerous.

Figure 12. Very Dangerous ETFs & Mutual Funds by Sector

newconstructs_sectorratings1q17_verydangerous_fig12

Source: New Constructs, LLC and company filings

Figure 13 presents the data charted in Figure 12.

Figure 13. Very Dangerous ETFs & Mutual Funds by Sector

newconstructs_sectorratings1q17_verydangerousstats_fig13

Source: New Constructs, LLC and company filings 


This article originally published here on January 4, 2017.

Disclosure: Kyle Martone owns The Coca-Cola Company (KO). David Trainer, Kyle Guske II, and Kyle Martone receive no compensation to write about any specific stock, sector or theme.

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