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1 May 2012

Best & Worst ETFs and Mutual Funds: All-cap Growth

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The all-cap growth style ranks fourth out of the twelve fund styles as detailed in my style roadmap. It gets my Neutral rating, which is based on aggregation of ratings of two ETFs and 457 mutual funds in the all-cap growth style as of April 24, 2012. Reports on the best & worst ETFs and mutual funds in every sector and style are on my blog and Trading Deck.

Figure 1 ranks from best to worst the only two all-cap growth ETFs. Figure 2 shows the five best and worst-rated all-cap growth mutual funds. The best ETFs and mutual funds allocate more value to Attractive-or-better-rated stocks than the worst, which allocate too much value to Neutral-or-worse-rated stocks.

To identify the best and avoid the worst ETFs and mutual funds within the all-cap growth style, investors need a predictive rating based on (1) stocks ratings of the holdings and (2) the all-in expenses of each ETF and mutual fund. Investors need not rely on backward-looking ratings. My fund rating methodology is detailed here.

Investors seeking exposure to the all-cap growth style should buy one of the Attractive-or-better rated mutual funds from Figure 2.

See ratings and reports on all ETFs and mutual funds in this style on my free mutual fund and ETF screener.

Figure 1: ETFs Ranked from Best to Worst

Sources: New Constructs, LLC and company filings

Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5

* Best mutual funds exclude funds with NAV’s less than 100 million.

Sources: New Constructs, LLC and company filings

iShares Russell 3000 Growth Index Fund [s: IWZ] is my top-rated all-cap growth ETF and earns my Neutral rating. Fidelity Commonwealth Trust II: Fidelity Large Cap Growth Enhanced Index Fund [s: FLGEX] is my top-rated all-cap growth mutual fund and earns my Attractive rating.

First Trust Multi Cap Growth AlphaDEX Fund [s: FAD] is my worst-rated all-cap growth ETF and earns my Neutral rating. Mutual Fund Series Trust: Catalyst/CP Core Equity Fund [s: CPEAX] is my worst-rated all-cap growth mutual fund and earns my Very Dangerous rating.

Figure 3 shows that 481 out of the 2271 stocks (over 45% of the total net assets) held by all-cap growth ETFs and mutual funds get an Attractive-or-better rating. However, none of two all-cap growth ETFs and seven out of 457 all-cap growth mutual funds (less than 2% of total net assets) get an Attractive-or-better rating.

The takeaways are: mutual fund managers allocate too much capital to low-quality stocks and all-cap growth ETFs hold poor quality stocks.

Figure 3: All-cap Growth Style Landscape For ETFs, Mutual Funds & Stocks

Sources: New Constructs, LLC and company filings

Investors need to tread carefully when considering all-cap growth ETFs and mutual funds, as all the ETFs and 98% of mutual funds are not worth buying. No ETFs and only seven mutual funds in the all-cap growth style allocate enough value to Attractive-or-better-rated stocks to earn an Attractive rating.

Oracle Corporation [s: ORCL] is one of my favorite stocks held by all-cap growth ETFs and mutual funds and earns my Very Attractive rating. I am bullish on the tech sector funds and ORCL is one of the best stocks in that sector. Like my other favorites stocks in the sector, ORCL boasts a top-quintile ROIC (28%), and the company maintains a very strong competitive position. Adept leadership has never been a problem as the company’s ROIC has stayed well above its cost of capital since at least 1998. With over $28 billion (about 20% of its market cap) in excess cash, Larry Ellison has the dry powder he needs to remain a leader in the software business.

Triumph Group, Inc. [s: TGI] is one of my least favorite stocks held by all-cap growth ETFs and mutual funds and earns my Very Dangerous rating. TGI has misleading earnings, which means that its reported earnings are positive and rising while its economic earnings are negative and declining. TGI has been a consistent value destroyer with negative economic earnings in nine of the last ten years.

As detailed in “Cheap Funds Dupe Investors”, the fund industry offers many cheap funds but very few funds with high-quality stocks, or with what I call good portfolio management.

Figures 4 and 5 show the rating landscape of all all-cap growth ETFs and mutual funds.

Our style roadmap report ranks all styles and highlights those that offer the best investments.

Figure 4: Separating the Best ETFs From the Worst Funds

Sources: New Constructs, LLC and company filings

Figure 5: Separating the Best Mutual Funds From the Worst Funds

Sources: New Constructs, LLC and company filings

Review my full list of ratings and rankings along with free reports on all two ETFs and 457 mutual funds in the all-cap growth style.

Disclosure: I own ORCL. I receive no compensation to write about any specific stock, sector, style or theme.

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