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Best & Worst ETFs and Mutual Funds: All Cap Value Style

Thursday, July 18th, 2013

The All Cap Value style ranks sixth out of the twelve fund styles as detailed in my Style Rankings for ETFs and Mutual Funds report. It gets my Neutral rating, which is based on aggregation of ratings of two ETFs and 249 mutual funds in the All Cap Value style as of July 17, 2013. 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 value ETFs and Figure 2 shows the five best and worst-rated All Cap value mutual funds. Not all All Cap Value style ETFs and mutual funds are created the same. The number of holdings varies widely (from 11 to 1949), 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 Value 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 Value style should buy one of the Attractive-or-better rated mutual funds from Figure 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 – Only Two ETFs

ACVF1* Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity.

Sources: New Constructs, LLC and company filings

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

ACVF2* Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity.

Sources: New Constructs, LLC and company filings

First Trust Multi Cap Value AlphaDEX Fund (FAB) is my top-rated All Cap Value ETF and SunAmerica Focused Dividend Strategy Portfolio (FDSWX) is my top-rated All Cap Value mutual fund. FAB gets my Neutral rating, While FDSWX gets my Very Attractive rating.

iShares Russell 3000 Value ETF (IWW) is my worst-rated All Cap Value ETF and American Beacon Mid Cap Value Fund (ABMAX) is my worst-rated All Cap Value mutual fund. IWW gets my Dangerous rating, while ABMAX gets my Very Dangerous rating.

Figure 3 shows that 327 out of the 2093 stocks (over 28% of the market value) in All Cap Value ETFs and mutual funds get an Attractive-or-better rating. However, neither of the All Cap Value ETFs and 4 out of 249 All Cap Value mutual funds (less than 4% 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 Value ETFs hold poor quality stocks.

Figure 3: All Cap Value Style Landscape For ETFs, Mutual Funds & Stocks

ACVF3Sources: New Constructs, LLC and company filings

As detailed in “Low-Cost 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 Value ETFs and mutual funds, as the majority are too risky or costly. No ETFs and 4 mutual funds in the All Cap Value style allocate enough value to Attractive-or-better-rated stocks to earn an Attractive rating.

Eli Lilly (LLY) is one of my favorite stocks held by All Cap Value ETFs and mutual funds and earns my Attractive rating. LLY has almost doubled profits (NOPAT) between 1998 and 2012, from $2 billion to $4 billion, and has a return on invested capital (ROIC) of 14%. Most impressive, however, is that LLY has earned positive economic earnings since the beginning of my model in 1998. Currently, LLY is trading at ~$51/share, which gives it a price to economic book value ratio of 0.8. This ratio implies that the market expects LLY’s profits to permanently decrease by 20%. However, LLY’s track record of NOPAT growth suggests that it will continue to increase profits. This stock is currently trading at a discount big enough for any investor interested in pharmaceuticals.

MetLife Inc. (MET) is one of my least favorite stocks held by All Cap Value ETFs and mutual funds and earns my Dangerous rating. MET’s profits (NOPAT) have actually declined by 8% compounded annually since 2007, and its return on invested capital (ROIC) is down from 9% to 3% over the same period. Declining NOPAT and ROIC suggests MET has been losing ground to competitors. Despite these warning signs, MET is trading at ~$49/share, and to justify this stock price, MET would need to grow profits by 9% compounded annually for 12 years. Some companies might be able to meet these growth expectations. However, MET’s struggles since 2007 make it highly unlikely that MET will achieve this goal. MET is currently overpriced and investors should avoid this stock.

Figures 4 and 5 show the rating landscape of all All Cap Value ETFs and mutual funds.

My 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

ACVF4Sources: New Constructs, LLC and company filings

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

ACVF5Sources: New Constructs, LLC and company filings

Review my full list of ratings and rankings along with reports on both ETFs and 249 mutual funds in the All Cap Value style.

André Rouillard contributed to this report.

Disclosure: I own LLY.  David Trainer and André Rouillard receive no compensation to write about any specific stock, sector, style or theme.

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