Tile letter on red rack in word ETF (abbreviation of Exchange Traded Fund) on wood background
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 77 different Technology ETFs and at least 286 ETFs across eleven sectors. Do investors need 26 choices on average per sector? How different can the ETFs be?
Those 77 Technology ETFs are very different from one another. With anywhere from 19 to 575 holdings, many of these Technology ETFs have drastically different portfolios with differing risk profiles and performance outlooks.
The same is true for the ETFs in any other sector, as each offers a very distinct mix of good and bad stocks. Basic Materials ranks first for stock selection. Real Estate ranks last.
Avoiding Analysis Paralysis
I think the large number of sector 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 causing them to miss profitable opportunities. Analyzing ETFs properly, 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 575 stocks or more for one ETF.
Figure 1 shows the top-rated ETF for each sector.
Figure 1: The Best ETF in Each Sector
Best ETF By Sector 4Q22
* Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity
Amongst the ETFs in Figure 1, First Trust Materials AlphaDEX Fund
How to Avoid “The Danger Within”
Why do you need to know the holdings of ETFs before you buy?
An ETF is nothing more than the sum of its component parts – if you don’t understand what it’s made of, you ultimately won’t understand what you’re buying. It would be 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
First Trust Materials AlphaDEX Fund (FXZ) is not only the top-rated Basic Materials ETF but is also the overall top ranked sector ETF out of the 286 sector ETFs that my firm covers.
The worst ETF in Figure 1 is VanEck Mortgage REIT Income ETF (MORT), which gets an Unattractive rating. One would think ETF providers could do better for this sector.
Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, sector, or theme.
Source: https://www.forbes.com/sites/greatspeculations/2022/12/05/how-to-find-the-best-sector-etfs-4q22/