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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 151 different All Cap Blend ETFs and at least 686 ETFs across twelve styles. Do investors need 57+ choices on average per style? How different can the ETFs be?
Those 151 All Cap Blend ETFs are very different from one another. With anywhere from 21 to 4,027 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 distinct mix of good and bad stocks. Large Cap Value ranks first for stock selection. Small Cap Growth ranks last.
Avoiding Analysis Paralysis
We 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 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 4,027 stocks or more, for one ETF.
Figure 1 shows our top-rated ETF for each style.
Figure 1: The Best ETF in Each Style
Best ETF By Style 4Q22
* Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity
Amongst the ETFs in Figure 1, Alpha Architect U.S. Quantitative Value ETF
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
Alpha Architect U.S. Quantitative Value ETF (QVAL) is not only the top-rated Mid Cap Blend ETF but is also the overall top ranked style ETF out of the 686 style ETFs that we cover.
The worst ETF in Figure 1 is First Trust Multi Cap Growth AlphaDEX Fund (FAD), which gets a Neutral rating. One would think ETF providers could do better for this style.
Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.
Source: https://www.forbes.com/sites/greatspeculations/2022/12/07/how-to-find-the-best-style-etfs-4q22/