Best And Worst ETFs ( And Mutual Funds): All-Cap Blends

The all-cap blend style ranks third 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 33 ETFs and 669 mutual funds in the all-cap blend style as of July 17, 2012.

Figures 1 and 2 show the five best- and worst-rated ETFs and mutual funds in the style. Not all all-cap blend style ETFs and mutual funds are created the same. The number of holdings varies widely (from 8 to 3280), 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 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.

Investors seeking exposure to the all-cap blend style should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 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 with the Best and Worst Ratings – Top 5

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

Sources: New Constructs, LLC and company filings

Four ETFs 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 and Worst Ratings – Top 5


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

Sources: New Constructs, LLC and company filings

Hennessy Funds Trust: Hennessy Cornerstone Large Growth Fund (HILGX) and Hennessy Funds Trust: Hennessy Cornerstone Large Growth Fund (HFLGX) are excluded from Figure 2 because their total net assets (TNA) are below $100 million and do not meet our liquidity standards.

Schwab US Dividend Equity ETF (SCHD) is my top-rated all-cap blend ETF and BlackRock LargeCap Series Funds, Inc: BlackRock LargeCap Growth Retirement Portfolio (MKLHX) is my top-rated all-cap blend mutual fund. Both earn my Attractive rating.

Guggenheim Wilshire 4500 Completion ETF (WXSP) is my worst-rated all-cap blend ETF and ProFunds: Banks UltraSector ProFund (BKPSX) is my worst-rated all-cap blend mutual fund. WXSP earns my Dangerous and BKPSX earns my Very Dangerous rating.

Figure 3 shows that 589 out of the 2846 stocks (nearly 50% of the total net assets) held by all-cap blend ETFs and mutual funds get an Attractive-or-better rating. However, only 2 out of 33 all-cap blend ETFs (less than 2% of total net assets) and 31 out of 669 all-cap blend mutual funds (less than 1% of total net assets) get an Attractive-or-better rating.

The takeaways is: investors have not identified funds with the best holdings, allocating 98% of the total net assets in all-cap blend ETFs to Neutral rated ETFs and 99% of the total net assets in all-cap mutual funds to funds rated Neutral or Dangerous.

Figure 3: All-Cap Blend Style Landscape For ETFs, Mutual Funds and 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 blend ETFs and mutual funds, as 50% of all-cap blend ETF and mutual fund total net assets are allocated to Neutral-or-worse-rated stocks. Only 2 ETFs and 31 mutual funds in the all-cap blend style allocate enough value to Attractive-or-better-rated stocks to earn an Attractive rating.

Exxon Mobil (XOM) is one of my favorite stocks held by all-cap blend ETFs and mutual funds and earns my Very Attractive rating. Exxon Mobil’s current stock price ($~85.00) implies that its profits will decline by 38% permanently. What do I mean by that? An asset’s value equals the present value of its future cash flows. If you forecast Exxon’s 2011 operating profits, or NOPAT, with absolutely no growth into perpetuity, and discount those profits back to the present value, you’ll find that the current share price is 38% below the value given by a permanent zero-growth forecast. If you agree that Exxon’s profits are going to decline by 38% permanently, then today’s stock price might seem reasonable. But if you think those expectations are too pessimistic for a company that has grown its NOPAT in each of the last five years while boosting ROIC from 11.7% to 15.4%, then you’ll see why XOM gets our Very Attractive rating. High and rising ROIC matched with consistent growth makes this company a great stock to pick up when the Mr. Market is overly pessimistic.

BEAM Inc. (BEAM) is one of my least favorite stocks held by all-cap blend ETFs and mutual funds and earns my Very Dangerous rating. In 2010 when Fortune Brands spun off its home security and golf portfolios to focus on its distilled spirits brands, some investors had high hopes. To be fair, BEAM’s portfolio contains some well-known and popular names, but has the company been profitable? I think a sober assessment of BEAM’s 5% ROIC, post-spin-off, would indicate that the restructuring has not left behind a value-creating, high-returns business. Spirits is a competitive industry, and a lot of BEAM’s future growth is going to need to come from expensive acquisitions. Worse yet, for BEAM to justify its current stock price, operations are going to need to improve dramatically, growing profits 15% compounded annually for the next 20 years. There is not much upside for an investor when expectations of such high growth are already baked into today’s stock price.

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

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

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