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

The all-cap value style ranks seventh out of the twelve fund styles as detailed in my style rankings for ETFs and mutual funds. It gets my Dangerous rating, which is based on aggregation of ratings of two ETFs and 266 mutual funds in the all-cap value style as of October 19, 2012.

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 12 to 2,035), 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.

Investors should not buy any all-cap value 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.

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


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

Sources: New Constructs, LLC and company filings

12 mutual funds are excluded from Figure 2 because their total net assets (TNA) are below $100 million and do not meet our liquidity standards.

iShares Russell 3000 Value (IWW) is my top-rated all-cap value ETF and Homestead Funds, Inc: Value Fund (HOVLX) is my top-rated all-cap value mutual fund. Both earn my Neutral rating.

First Trust Multi Cap Value AlphaDEX Fund (FAB) is my worst-rated all-cap value ETF and Janus Investment Fund: Perkins Select Value Fund (JVSAX) is my worst-rated all-cap value mutual fund. Both earn my Dangerous-or-worse rating.

Figure 3 shows that 448 out of the 2,144 stocks (over 30% of the total net assets) held by all-cap value ETFs and mutual funds get an Attractive-or-better rating. However, none of the all-cap value ETFs and only one mutual fund 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 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 value ETFs and mutual funds as only one fund is worth buying. Investors are better off focusing on individual all-cap value stocks.

Abbott Laboratories (ABT) is one of my favorite stocks held by all-cap value funds. It receives my Very Attractive rating due to its high profitability and low valuation. Abbott has produced a positive economic earnings margin every year since 1998. Over the past five years Abbott increased their after-tax operating earnings (NOPAT) at a CAGR of 14% a year. Ironically, in return for this growth in profits, the market has assigned ABT a price-to-economic book (P/EBV) value of 0.8, which means the current valuations of the stock implies the company will experience a permanent decline in profits of 20%. The disconnect between the market’s expectations and ABT’s recent performance makes ABT a Very Attractive stock.

Masco Corporation (MAS) is one of the least favorite stocks held by all-cap value. Contrary to ABT, MAS receives a Dangerous rating because its lack of profitability and high valuation. MAS has never generated positive economic earnings in all 14 years of my model. On top of this poor profitability, to justify MAS’ current stock price of ~$15.16, the company must grow its after-tax profit (NOPAT) by 20% compounded annually for the next twelve years. Over the past 12 years, MAS’s NOPAT has decline by 9% compounded annually. It appears MAS’ current stock price carries seriously high expectations. Investors would be smart avoid to this stock in favor of more Attractive alternatives.

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

Figure 4: Separating the Best ETFs From the Worst Fund


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 receive no compensation to write about any specific stock, sector, style or theme.