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

The all-cap growth style ranks fifth out of the twelve fund styles as detailed in my style rankings for ETFs and mutual funds. It gets my Neutral rating, which is based on aggregation of ratings of two ETFs and 490 mutual funds in the all-cap growth style as of October 17, 2012. Prior reports on the best & worst ETFs and mutual funds in every sector and style are here.

Figure 1 ranks from best to worst the two all-cap growth ETFs and Figure 2 shows the five best and worst-rated all-cap growth mutual funds. Not all all-cap growth style ETFs and mutual funds are created the same. The number of holdings varies widely (from 16 to 2061), which creates drastically different investment implications and ratings. 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 Figures 2.

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

Figure 1: ETFs with the Best & Worst Ratings

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

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 (IWZ) is my top-rated all-cap growth ETF and earns my Neutral rating. Advisers Investment Trust: Independent Franchise Partners US Equity Fund (IFPUX) is my top-rated all-cap growth mutual fund and earns my Attractive rating.

First Trust Multi Cap Growth AlphaDEX Fund (FAD) is my worst-rated all-cap growth ETF and earns my Neutral rating. Starboard Investment Trust: Caritas All-Cap Growth Fund (CTSAX) is my worst-rated all-cap growth mutual fund and earns my Very Dangerous rating.

Figure 3 shows that 505 out of the 2125 stocks (over 42% of the total net assets) held by all-cap growth ETFs and mutual funds get an Attractive-or-better rating. However, neither of two all-cap growth ETFs and only ten out of 489 all-cap growth mutual funds (less than 1% 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

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.

Investors need to tread carefully when considering all-cap growth ETFs and mutual funds, as only 10 mutual funds in the all-cap growth style allocate enough value to Attractive-or-better-rated stocks to earn an Attractive rating.

Microsoft Corporation (MSFT) is one of my favorite stocks held by all-cap growth ETFs and mutual funds and earns my Very Attractive rating. MSFT has generated a return on invested capital (ROIC) above 67% every year since 2001, with an impressively average ROIC of 113% over the 12 year period. MSFT’s 2012 ROIC is 71%. This consistent performance puts MSFT in the top 2% of the Russell 3000 every year for this 12-year period. Combine MSFT’s history of operational excellence with a stock price (~$29.49) that implies that cash flows will permanently decline by 42%, and you have an investment primed to outperform.

Ashland Inc. (ASH) is one of my least favorite stocks held by all-cap growth ETFs and mutual funds and earns my Very Dangerous rating. ASH is a value destroyer that has produced negative economic earnings in each of the last 14 years, my full coverage history. In order to justify its current stock price of ~$69.85, ASH will need to grow its profits by 13.6% annually for the next 20 years, a high hurdle for a company with a history of poor performance.

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

Our style rankings for ETFs and mutual funds 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 reports on the two ETFs and 490 mutual funds in the all-cap growth style.

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

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