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19 July 2013

Best & Worst ETFs and Mutual Funds: Mid Cap Blend Style

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The Mid Cap Blend style ranks seventh out of the twelve fund styles as detailed in my Style Rankings for ETFs and Mutual Funds report. It gets my Dangerous rating, which is based on aggregation of ratings of 16 ETFs and 321 mutual funds in the Mid Cap Blend style as of July 18, 2013. Prior reports on the best & worst ETFs and mutual funds in every sector and style are here.

Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the style. Not all Mid Cap Blend style ETFs and mutual funds are created the same. The number of holdings varies widely (from 27 to 3023), 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 Mid Cap Blend 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 should not buy any Mid Cap Blend ETFs or mutual funds because none get an Attractive-or-better rating. If you must have exposure to this style, you should buy a basket of Attractive-or-better rated stocks and avoid paying undeserved fund fees. Active management has a long history of not paying off.

Get my ratings on all ETFs and mutual funds in this style by searching for Mid Cap Blend on my free mutual fund and ETF screener.

Figure 1: ETFs with the Best & Worst Ratings – Top 5

midcapblend1* Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity.

Sources: New Constructs, LLC and company filings

PowerShares RAFI Fundamental Pure Mid Core Portfolio (PXMC), Guggenheim Russell Mid Cap Equal Weight ETF (EWRM) and Guggenheim Mid Cap Core ETF (CZA) are excluded from Figure 1 because their total net assets (TNA) are below $100 million and do not meet our liquidity standards.

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

midcapblend2* Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity.

Sources: New Constructs, LLC and company filings

Unified Series Trust IMS Capital Value Fund (IMSCX), Boston Trust Mid Cap Fun (BTMFX) and Stewart Capital Mid Cap Fun (SCMFX) are excluded from Figure 2 because their total net assets (TNA) are below $100 million and do not meet our liquidity standards.

Vanguard Mid Cap ETF (VO) is my top-rated Mid Cap Blend ETF and Calvert Capital Accumulation Fund (CCPIX) is my top-rated Mid Cap Blend mutual fund. Both earn my Neutral rating.

Vanguard Extended Market ETF (VXF) is my worst-rated Mid Cap Blend ETF and Saratoga Advantage Trust Mid Capitalization Portfolio (SPMAX) is my worst-rated Mid Cap Blend mutual fund. VXF gets my Dangerous rating, while SPMAX receives my Very Dangerous rating.

Figure 3 shows that 333 out of the 2433 stocks (over 19% of the market value) in Mid Cap Blend ETFs and mutual funds get an Attractive-or-better rating. However, zero out of 16 Mid Cap Blend ETFs and zero out of 321 Mid Cap Blend mutual funds get an Attractive-or-better rating.

The takeaways are: mutual fund managers allocate too much capital to low-quality stocks and Mid Cap Blend ETFs hold poor quality stocks.

Figure 3: Mid Cap Blend Style Landscape For ETFs, Mutual Funds & Stocks 

midcapblend3Sources: 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 Mid Cap Blend ETFs and mutual funds, as the majority of funds earn below a Neutral rating. Zero ETFs and zero mutual funds in the Mid Cap Blend style allocate enough value to Attractive-or-better-rated stocks to earn an Attractive rating. Investors would be better off focusing on individual Attractive stocks instead.

Amdocs Inc. (DOX) is one of my favorite stocks held by Mid Cap Blend ETFs and mutual funds and earns my Very Attractive rating. Amdocs has grown profits (NOPAT) by 40% compounded annually since 2000, and has a return on invested capital (ROIC) of 11%. DOX serves major telecommunications and technology companies through billing, order management, and customer care services, and has the largest client portfolio in its industry. As these large companies compete and expand into emerging markets in Asia, DOX will expand along with them. Despite its excellent track record of growth and future growth opportunities, the stock trades at a discount to its no-growth value. At ~$39/share, DOX trades has a price to economic book value ratio of 0.8, which means that the market expects DOX’s profits to permanently decline by 20%. DOX is well positioned for future growth, and investors should consider this stock while it still trades at this discount.

Service Corporation International (SCI) is one of my least favorite stocks held by Mid Cap Blend ETFs and mutual funds and earns my Dangerous rating. SCI’s profits (NOPAT) have fallen by 3% compounded annually since 1998 and its return on invested capital (ROIC) of just 2% puts it in the bottom quintile of all companies I cover. Despite this contraction over the past 14 years, SCI is trading at a valuation that embeds an awful lot of NOPAT growth. To justify ~$19/share, the company must grow NOPAT by over 13% compounded annually for 11 years. Judging by SCI’s past growth, it seems highly unlikely the company will meet these expectations. SCI is too expensive at its current price. Investors should look elsewhere.

Figures 4 and 5 show the rating landscape of all Mid Cap Blend 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

midcapblend4

Sources: New Constructs, LLC and company filings

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

midcapblend5

Sources: New Constructs, LLC and company filings

Review my full list of ratings and rankings along with reports on all 16 ETFs and 321 mutual funds in the Mid Cap Blend style.

André Rouillard and Sam McBride contributed to this report.

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

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