Stock Picking Grades For ETFs And Mutual Funds: Energy Sector

This report shows how well Consumer Staples ETFs and mutual fund managers pick stocks. We juxtapose our Portfolio Management rating on funds, which grades managers based on the quality of the stocks they choose, with the number of good stocks available in the sector. This analysis shows whether or not ETF providers and mutual fund managers deserve their fees.

For example, if a fund has a poor Portfolio Management rating in a sector where there are lots of good stocks, that fund does not deserve the fees it charges, and investors are much better off putting money in a passively-managed fund or investing directly in the sector’s good stocks. On the other hand, if a fund has a good Portfolio Management rating in a sector where there are lots of bad stocks, then investors should put money in that fund assuming the fund’s costs are competitive.

Figure 1 shows how many good stocks, according to our nationally-recognized ratings, are in the sector and their market cap. Next, it juxtaposes the Portfolio Management ratings of the ETFs and mutual funds in the sector. We think investors can gain an advantage with our forward-looking fund ratings since past performance is not a reliable predictor of future returns.

Figure 1 shows that 21 out of the 357 stocks (only 11% of the market value) in Energy ETFs and mutual funds get an Attractive-or-better rating.

The main takeaway from Figure 1 is that no ETFs allocate enough to quality stocks to earn an Attractive-or-better Portfolio Management rating. ETF providers in the Energy sector are not earning their fees. Mutual fund managers have not fared much better. No mutual funds allocate enough of their assets to quality stocks to earn an Attractive-or better Portfolio Management rating either.

With no quality ETFs it is not surprising where investors are placing their money. Investing in Energy ETFs forces money into poorly rated ETFs. The picture is no better for mutual fund investors as 96% of investor assets are allocated to Dangerous-or-worse rated mutual funds. With only 1 mutual fund earning even a Neutral Portfolio Management rating, investors would be better off sticking with individual stocks since they won’t be charged unnecessary fees.

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

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