Rating Breakdown: Best & Worst ETFs And Mutual Funds By Sector

This report focuses on my top picks and pans for all sector funds. I will follow this summary with a detailed report on each sector.

My top ETFs and mutual funds have high-quality holdings and low costs. As detailed in “Low-cost funds dupe investors”, there are few funds that have both good holdings and low costs. While there are lots of cheap funds, there are very few with high-quality holdings.

I think there are at least two causes for this disconnect. First, there is, in general, a lack of independent research on ETFs and funds. Second, I think it is fair to say that there is a severe lack of quality research into the holdings of mutual funds and ETFs. There should not be such a large gap between the quality of research on stocks compared to that for funds.

After all, investors should care more about the quality of a fund’s holdings than its costs because the quality of a fund’s holdings is the single most important factor in determining its future performance.

My predictive rating system rates 7200+ ETFs and mutual funds according to the quality of their holdings (Portfolio Management Rating), their costs (Total Annual Costs Rating), and the fund’s rank relative to every other ETF and mutual fund.

Figure 1 shows the best ETF or mutual fund in each sector as of July 8, 2014.

For a full list of all ETFs and mutual funds for each sector ranked from best to worst, see our ETF & mutual fund screener.

Figure 1: Best ETF or Mutual Fund In Each Sector

Rating_breakdown_3Q14_1

Source: New Constructs, LLC and company filings

PowerShares KBW Property & Casualty Insurance Portfolio ETF (KBWP) is my overall highest rated ETF and earns my Very Attractive rating. KBWP allocates over 90% of its assets to Attractive-or-bettter rated stocks, all while charging investors low total annual costs of 0.40%.

The Chubb Corp (CB) is one of my favorite stocks held by KBWP and earns my Very Attractive rating.  It also makes the Most Attractive Stocks list for July. Over the past decade CB has grown after-tax profit (NOPAT) by 13% compounded annually and CB’s return on invested capital (ROIC) of 16% is in the top quintile of all companies I cover. CB has also generated posistive economic earnings for 10 consecutive years. The best part about CB is that despite its stock price increasing over 12% since February, the company is still undervalued. At its current price of ~$93/share, CB has a price to economic book value ratio (PEBV) of 0.7. This ratio implies the market expects a permanent 30% decline in CB’s NOPAT. This expectation seems pessimistic considering CB’s strong history of growing NOPAT. At its current price CB presents an excellent opportunity for investors.

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

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