How To Find The Best Style ETFs 1Q23

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 168 different All Cap Blend ETFs and at least 725 ETFs across twelve styles. Do investors need 60+ choices on average per style? How different can the ETFs be?

Those 168 All Cap Blend ETFs are very different from each other. With anywhere from 21 to 3,997 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. Large 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 3,997 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 excludes ETFs with Total Net Assets (TNA) under $100 million due to inadequate liquidity

Amongst the ETFs in Figure 1, Direxion Daily Homebuilders and Supplies Bull 3X Shares (NAIL) ranks first overall, Alpha Architect U.S. Quantitative Value ETF QVAL
ranks second, and Cambria ETF Trust: Cambria Value VAMO
and Momentum ETF ranks third. Invesco S&P MidCap Momentum ETF XMMO
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

Direxion Daily Homebuilders and Supplies Bull 3X Shares is not only the top-rated All Cap Blend ETF, but is also the overall top-ranked style ETF out of the 725 style ETFs that I cover.

The worst ETF in Figure 1 is Invesco S&P MidCap Momentum ETF, which still gets a Very Attractive rating.

Disclosure: David Trainer, Kyle Guske II, and Italo Mendonca receive no compensation to write about any specific stock, style, or theme.