How to Find the Best Sector ETFs 3Q18

David Trainer  |


Finding the best ETFs is an increasingly difficult task in a world with so many to choose from. How can you pick with so many choices available?

Don’t Trust ETF Labels

There are at least 46 different Technology ETFs and at least 237 ETFs across eleven sectors. Do investors need 21+ choices on average per sector? How different can the ETFs be?

Those 46 Technology ETFs are very different. With anywhere from 25 to 356 holdings, many of these Technology ETFs have drastically different portfolios, creating drastically different investment implications.

The same is true for the ETFs in any other sector, as each offers a very different mix of good and bad stocks. Consumer Non-cyclicals rank first for stock selection. Energy ranks last. Details on the Best & Worst ETFs in each sector are here.

How to Avoid Paralysis by Analysis

We think the large number of Technology (or any other) sector ETFs hurts investors more than it helps because too many options can be paralyzing. It is simply not possible for the majority of investors to properly assess the quality of so many ETFs. Analyzing ETFs, done with the proper diligence[1], 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 356 stocks or more for one ETF.

Anyone focused on fulfilling the fiduciary duty of care recognizes that analyzing the holdings[2] of an ETF is critical to finding the best ETF. Figure 1 shows our top-rated ETF for each sector.

Figure 1: The Best ETF in Each Sector

Sources: New Constructs, LLC and company filings

* Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity

Amongst the ETFs in Figure 1, iShares Mortgage Real Estate ETF ( (REM)) ranks first overall, Fidelity MSCI Consumer Staples Index ( (FSTA)) ranks second, and State Street SPDR S&P Homebuilders ETF (XHB) ranks third. Fidelity MSIC Utilities Index ( (FUTY)) 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. Don’t just take my word for it, see what Barron’s says on this matter.

PERFORMANCE OF FUND’S HOLDINGS = PERFORMANCE OF FUND

Analyzing each holding within funds is no small task. Our Robo-Analyst technology enables us to perform this diligence with scale and provide the research needed to fulfill the fiduciary duty of care. More of the biggest names in the financial industry (see At BlackRock, Machines Are Rising Over Managers to Pick Stocks) are now embracing technology to leverage machines in the investment research process. Technology may be the only solution to the dual mandate for research: cut costs and fulfill the fiduciary duty of care. Investors, clients, advisors and analysts deserve the latest in technology to get the diligence required to make prudent investment decisions.

If Only Investors Could Find Funds Rated by Their Holdings

Our ETF ratings leverage our stock coverage. We rate ETFs based on the aggregated ratings of the stocks each ETF holds.

iShares Mortgage Real Estate ETF ( (REM)) is not only the top-rated Real Estate ETF, but is also the overall top-ranked sector ETF out of the 237 sector ETFs that we cover.

The worst ETF in Figure 1 is Fidelity MSCI Utilities Index ( (FUTY)), which gets a Neutral rating. One would think ETF providers could do better for this sector.

This article originally published on July 30, 2018.

Disclosure: David Trainer, Kyle Guske II, and Sam McBride receive no compensation to write about any specific stock, sector, or theme.

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[1] Ernst & Young’s recent white paper “Getting ROIC Right” proves the superiority of our holdings research and analytics.

[2] Harvard Business School features the powerful impact of our research automation technology in the case New Constructs: Disrupting Fundamental Analysis with Robo-Analysts.

DISCLOSURE: Disclosure: David Trainer, Kyle Guske II, and Sam McBride receive no compensation to write about any specific stock, sector, or theme.


The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
REM iShares Trust Mortgage Real Estate 42.20 0.45 1.08 333,019 Trade
FSTA Fidelity MSCI COnsumer Staples Index 31.84 0.23 0.73 37,055
FUTY Fidelity MSCI Utilities Index 35.02 0.14 0.40 81,323

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