The guts of an ETF are its holdings. And an ETF’s guts are what drive my ETF (and mutual fund) ratings. As highlighted in Barron’s The Danger Within, the only truly diligent assessment of an ETF or fund is based on its holdings.
Research on an ETF’s holdings is important because an ETF’s performance is only as good as its holdings’ performance. Therefore, if you care about performance, you care about the ETF’s holdings. No matter how cheap an ETF is, if it holds bad stocks, performance will be bad. Low expenses on bad performance still results in bad performance.
HOLDINGs PERFORMANCE = PERFORMANCE OF ETF
The only problem with analyzing an ETF’s holdings is that it is can be difficult and time consuming. Unfortunately for me but fortunately for you, I like difficult and time-consuming work as long as it gives me a competitive edge, of course.
In going through the 400+ US equity ETFs I cover (based on the 3000+ stocks I cover), I found one of the worst ETFs in the market: Pro Shares Ultra Real Estate (URE).
Thumbs Down
URE gets my worst rating, Very Dangerous. 88% of its portfolio (i.e. its guts) is in stocks that get my Dangerous or worse rating. Only 2% of its portfolio gets an Attractive or better rating.
Making matters worse: it is a double-long ETF so the leverage will amplify its performance 2x. That is good, of course, if the stocks in the ETF rise. It is really bad if they fall. According to my analysis of the fund’s holdings, they are much more likely to fall than rise.
Also making matters worse, only two ETFs out of the 400+ I cover have a higher cost than URE. We measure the annualized cost of URE at 1.06%. That is higher than a lot of mutual funds. As a side note, we cover well over 7000 mutual funds. And I found ten that have annualized costs higher than 7%.
This ETF is expensive and has bad holdings. Double whammy.
Details on URE’s Guts.
Top Five Holdings
Below I briefly cover URE’s top five holdings and highlight why they are bad stocks. In summary, all of the stocks below have very expensive valuations and offer investors little to no upside while presenting significant downside risk. These five holdings are representative of most of URE’s portfolio. As mentioned above, I rate 88% of URE’s portfolio as Dangerous or worse. And only 2% of its holdings get my Attractive rating.
- Simon Property Group (SPG) – Very Dangerous Rating: misleading earnings, and very expensive valuation. Current valuation implies the company will grow its cash flows (NOPAT) at 20% compounded annually for nearly 9 years. Historically, NOPAT growth is 9% since 1998.
- American Tower (AMT) – Dangerous Rating: decent economics, very expensive valuation. Current valuation implies the company will grow its cash flows (NOPAT) at 20% compounded annually for 10 years. Historically, NOPAT growth is 20% over the last five years.
- Public Storage (PSA) – Dangerous Rating: decent economics, very expensive valuation. Current valuation of the stock implies the company will grow its cash flows (NOPAT) at 17% compounded annually for nearly 15 years. Historically, NOPAT growth is 10% since 1998.
- HCP Inc (HCP) – Dangerous Rating: mediocre economics, very expensive valuation. Current valuation of the stock implies the company will grow its cash flows (NOPAT) at 18% compounded annually for 15 years. Historically, NOPAT growth is 10% since 1998.
- Ventas (VTR) – Very dangerous rating, misleading earnings and very expensive valuation. . Current valuation of the stock implies the company will grow its cash flows (NOPAT) at 23% compounded annually for nearly 15 years. Historically, NOPAT growth is 17% since 1999.
Disclosure: I receive no compensation to write about any specific stock or theme.