With an ever-growing list of similar-sounding ETFs to choose from, finding the best is an increasingly difficult task. How can investors change the game to shift the odds in their favor?
Don’t Trust ETF Labels
There are at least 232 different All Cap Blend ETFs and at least 898 ETFs across twelve styles. Do investors need 74+ choices on average per style? How different can the ETFs be?
Those 232 All Cap Blend ETFs are very different from each other. With anywhere from 1 to 9,752 holdings, many of these All Cap Blend ETFs have drastically different portfolios with differing risk profiles and performance outlooks.
The same is true for the ETFs in any other style, as each offers a very different mix of good and bad stocks. All Cap Value ranks first for stock selection. Small Cap Growth ranks last.
Avoiding Analysis Paralysis
I think the large number of style ETFs hurts investors more than it helps. Manually conducting a deep analysis for every ETF is simply not a realistic option, exposing investors to insufficient analysis and missing profitable opportunities. Analyzing ETFs, with the proper diligence, is far more difficult than analyzing stocks because it means analyzing all the stocks within each ETF. As stated above, there can be as many as 9,752 stocks or more, for one ETF.
Figure 1 shows the top-rated ETF for each style.
Figure 1: The Best ETF in Each Style
* Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity
Amongst the ETFs in Figure 1, Euclidean Fundamental Value ETF (ECML) ranks first overall, Alpha Architect U.S. Quantitative Value ETF (QVAL) ranks second, and Distillate U.S. Fundamental Stability & Value ETF (DSTL) ranks third. iShares Morningstar Mid Cap Growth ETF (IMCG) ranks last.
How to Avoid “The Danger Within”
Why do you need to know the holdings of ETFs before you buy?
You need to be sure you do not buy an ETF that might blow up. Buying an ETF without analyzing its holdings is like buying a stock without analyzing its business and finances. No matter how cheap, if it holds bad stocks, the ETF’s performance will be bad.
PERFORMANCE OF FUND’S HOLDINGS – FEES = PERFORMANCE OF FUND
If Only Investors Could Find Funds Rated by Their Holdings
Euclidean Fundamental Value ETF (ECML) is not only the top-rated All Cap Value ETF, but is also the overall top-ranked style ETF out of the 898 style ETFs that my firm covers.
The worst ETF in Figure 1 is iShares Morningstar Mid Cap Growth ETF (IMCG), which gets a Neutral rating. One would think ETF providers could do better for this style.
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