How To Find The Best Style ETFs

Why do investors need to know the holdings of ETFs before they buy? They need to know to be sure they do not buy a fund that might blow up. Buying a fund without analyzing its holdings is like buying a stock without analyzing its business and finances. As Barron’s says, investors should know the Danger Within. No matter how cheap, if it holds bad stocks, the ETF’s performance will be bad.

PERFORMANCE OF FUND’S HOLDINGS = PERFORMANCE OF FUND

Finding the Style ETFs with the Best Holdings

Figure 1 shows my top-rated ETF for each style. Importantly, my ratings on ETFs are based primarily on mystock ratings of their holdings. My firm covers over 3000 stocks and is known for the due diligence we do for each stock we cover. Accordingly, our coverage of ETFs leverages the diligence we do on each stock by rating ETFs based on the aggregated ratings of the stocks each ETF holds.

WisdomTree U.S. Dividend Growth (DGRW) is the top-rated All Cap Blend ETF and the overall fourth-ranked fund of the 256 style ETFs that I cover.

Sometimes, You Get What You Pay For

It is troubling to see one of the best style ETFs, First Trust Capital Strength ETF (FTCS) have just $78 million in assets despite its Very Attractive or 5-star rating. On the other hand, Neutral-rated iShares Russell Midcap Growth Index ETF (IWP) has over $4.8 billion in assets. IWP has lower total annual costs than FTCS (0.25% and 0.72% respectively), but low costs cannot drive positive performance. Quality holdings are the ultimate driver of performance.

I cannot help but wonder if investors would leave IWP if they knew that it has such a poor portfolio of stocks. It is cheaper than FTCS, but, as previously stated, low fees cannot growth wealth; only good stocks can.

Sometimes, You DON’T Get What You Pay For

iShares Enhanced US Small-Cap ETF (IESM) is one of the smallest ETFs in Figure 1 with just $13 million in assets. Sadly, other Small Cap Blend ETFs with more assets and inferior portfolios charge more than IESM. In other words, Small Cap Blend ETF investors are paying extra fees for no reason.

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

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