With an ever-growing list of similar-sounding ETFs to choose from, finding the best is an increasingly difficult task. How can investors change the game to shift the odds in their favor?
Don’t Trust ETF Labels
There are at least 192 different All Cap Blend ETFs and at least 753 ETFs across twelve styles. Do investors need 63+ choices on average per style? How different can the ETFs be?
Those 192 All Cap Blend ETFs are very different from each other. With anywhere from 10 to 3,844 holdings, many of these All Cap Blend ETFs have drastically different portfolios with differing risk profiles and performance outlooks.
The same is true for the ETFs in any other style, as each offers a very different mix of good and bad stocks. Large Cap Value ranks first for stock selection. Small Cap Growth ranks last.
Avoiding Analysis Paralysis
I think the large number of style ETFs hurts investors more than it helps. Manually conducting a deep analysis for every ETF is simply not a realistic option, exposing investors to insufficient analysis and missing profitable opportunities. Analyzing ETFs, with the proper diligence, is far more difficult than analyzing stocks because it means analyzing all the stocks within each ETF. As stated above, there can be as many as 3,844 stocks or more for one ETF.
Figure 1 shows the top-rated ETF for each style.
Figure 1: The Best ETF in Each Style
* Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity
Amongst the ETFs in Figure 1, Alpha Architect US Quantitative Value ETF
QVAL
ranks first overall, Pacer US Small Cap Cash Cows 100 ETF
CALF
ranks second, and Euclidean Fundamental Value ETF (ECML) ranks third. Capital Group Global Growth Equity ETF (CGGO) ranks last.
How to Avoid “The Danger Within”
Why do you need to know the holdings of ETFs before you buy?
You need to be sure you do not buy an ETF that might blow up. Buying an ETF without analyzing its holdings is like buying a stock without analyzing its business and finances. No matter how cheap, if it holds bad stocks, the ETF’s performance will be bad. Don’t just take my word for it, see what Barron’s says on this matter.
PERFORMANCE OF FUND’S HOLDINGS – FEES = PERFORMANCE OF FUND
If Only Investors Could Find Funds Rated by Their Holdings
Alpha Architect US Quantitative Value ETF (QVAL) is not only the top-rated Mid Cap Blend ETF, but is also the overall top-rated style ETF out of the 753 style ETFs that my firm covers.
The worst ETF in Figure 1 is Capital Group Global Growth Equity ETF (CGGO), which still gets an attractive rating.
Disclosure: David Trainer, Kyle Guske II, Hakan Salt, and Italo Mendonça receive no compensation to write about any specific stock, style, or theme.
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