How To Find The Best Style ETFs

ProShares Ultra Russell2000 ETF (UWM) is one of the worst ETFs in the Small Cap Blend style. It gets my Dangerous rating based off the fact that less than 5% of its assets are allocated to Attractive-or-better rated stocks, while over 62% of its assets are allocated to Dangerous-or-worse stocks. UWM also has total annual costs of 1.06%, higher than IESM’s 0.4%. One would think that UWM would have fewer assets than IESM, but instead it has over $206 million. Investors are paying extra fees for poor holdings.

The worst ETF in Figure 1 is Vanguard S&P Small-Cap 600 Growth ETF (VIOG), which gets a Neutral (3 Star) rating. One would think ETF providers could do better for this style.

I recommend investors only buy ETFs with more than $100 million in assets. You can find more liquid alternatives for the other funds on my ETF screener.

Covering All The Bases, Including Costs

My ETF rating also takes into account the total annual costs, which represents the all-in cost of being in the ETF. This analysis is complex for mutual funds but straightforward for ETFs, where all costs are factored into the expense ratio. While costs play a smaller role than holdings, my ratings penalize those ETFs with abnormally high costs.

Top Stocks Make Up Top ETFs

Lockheed Martin Corp (LMT) is one of my favorite companies held by FTCS and receives my Attractive rating. Over the past decade, LMT has grown after tax profit (NOPAT) by 11% compounded annually. Over this same time frame LMT has increased its return on invested capital (ROIC) from 6% in 2003 to 11% in 2013. The company has also generated positive economic earnings every year since 2004. Despite its strong profit growth, LMT remains undervalued. LMT’s current price of ~$167/share gives it a price to economic book value (PEBV) ratio of 1.2. This ratio implies that the market expects LMT will grow NOPAT by no more than 20% over the remaining life of the company. Given LMT’s past decade of strong profit growth, this expectation seems rather pessimistic and one that LMT should surpass.

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

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