1Q16 Sector Ratings For ETFs & Mutual Funds

At the beginning of the first quarter of 2016, only the Consumer Staples sector earns an Attractive-or-better rating. Our sector ratings are based on the aggregation of our fund ratings for every ETF and mutual fund in each sector. See last quarter’s Sector Ratings here.

Investors looking for sector funds that hold quality stocks should look no further than the Consumer Staples or Information Technology sectors. These sectors house the most Attractive-or-better rated funds with the most assets. Figures 4 through 7 provide more details. The primary driver behind an Attractive fund rating is good portfolio management, or good stock picking, with low total annual costs.

Attractive-or-better ratings do not always correlate with Attractive-or-better total annual costs. This fact underscores that (1) cheap funds can dupe investors and (2) investors should invest only in funds with good stocks and low fees.

See Figures 4 through 13 for a detailed breakdown of ratings distributions by sector. See our ETF & mutual fund screener for rankings, ratings and reports on 7000+ mutual funds and 400+ ETFs. Our fund rating methodology is detailed here.

All of our reports on the best & worst ETFs and mutual funds in every sector are available here.

Figure 1: Ratings For All Sectors

NewConstructs_1Q16_SectorRatings

Source: New Constructs, LLC and company filings

To earn an Attractive-or-better Predictive Rating, an ETF or mutual fund must have high-quality holdings and low costs. Only the top 30% of all ETFs and mutual funds earn our Attractive or better ratings.

State Street Select Sector SPDR Trust: Consumer Staples (XLP) is the top rated Consumer Staples fund. It gets our Very Attractive rating by allocating over 37% of its value to Attractive-or-better-rated stocks.

Proctor & Gamble (PG: $78/share) is one of our favorite stocks held by XLP and earns our Attractive rating. Over the past decade, Proctor & Gamble, one of the largest consumer goods companies in the world, has grown after-tax profit (NOPAT) by 6% compounded annually over the past decade. Since 2008, PG has maintained a double-digit return on invested capital (ROIC) and currently earns a 12% ROIC. In spite of declining revenues, Proctor & Gamble has generated a cumulative $64 billion in free cash flow over the past five years alone. Best of all, PG shares remain undervalued. At its current price of $78/share, PG has a price to economic book value (PEBV) ratio of 1.1. This ratio means the market expects Proctor & Gamble to grow NOPAT by only 10% over its remaining corporate life. However, if the company can grow NOPAT by just 3% compounded annually for the next decade, shares are worth $91/share today – a 17% upside.

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Disclosure: New Constructs staff receive no compensation to write about any specific stock, sector, or ...

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