Best & Worst ETFs and Mutual Funds: All Cap Blend Style

The All Cap Blend style ranks third out of the twelve fund styles as detailed in my style rankings for ETFs and mutual funds. It gets my Neutral rating, which is based on aggregation of ratings of 31 ETFs and 753 mutual funds in the All Cap Blend style as of October 18, 2012. Prior reports on the best & worst ETFs and mutual funds in every sector and style are here.

Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the style. Not all All Cap Blend style ETFs and mutual funds are created the same. The number of holdings varies widely (from 28 to 3076), which creates drastically different investment implications and ratings. The best ETFs and mutual funds allocate more value to Attractive-or-better-rated stocks than the worst, which allocate too much value to Neutral-or-worse-rated stocks.

To identify the best and avoid the worst ETFs and mutual funds within the All Cap Blend style, investors need a predictive rating based on (1) stocks ratings of the holdings and (2) the all-in expenses of each ETF and mutual fund. Investors need not rely on backward-looking ratings. My fund rating methodology is detailed here.

Investors seeking exposure to the All Cap Blend style should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2.

Get my ratings on all ETFs and mutual funds in this style on my free mutual fund and ETF screener.

* Best ETFs exclude ETFs with less NAV’s less than 100 million.

AdvisorShares TrimTabs Float Shrink ETF TTFS is excluded from Figure 1 because its total net assets (TNA) are below $100 million and do not meet our liquidity standards.

* Best mutual funds exclude funds with NAV’s less than 100 million.

These mutual funds were excluded from Figure 2 because their total net assets (TNA) are below $100 million and do not meet our liquidity standards.

Schwab US Dividend Equity ETF SCHD is my top-rated All Cap Blend ETF and FundVantage Trust: Formula Investing US Value Select Fund FNSIX is my top-rated All Cap Blend mutual fund. Both earn my Attractive rating.

Guggenheim Wilshire 4500 Completion ETF WXSP is my worst-rated All Cap Blend ETF and Rydex Series Funds: Russell 2000 1.5x Strategy Fund RYAKX is my worst-rated All Cap Blend mutual fund. WXSP earns my Dangerous rating and RYAKX earns my Very Dangerous rating.

Figure 3 shows that 593 out of the 2802 stocks (over 48% of the total net assets) held by All Cap Blend ETFs and mutual funds get an Attractive-or-better rating. However, only 2 out of 31 All Cap Blend ETFs (less than 2% of total net assets) and 42 out of 753 All Cap Blend mutual funds (less than 1% of total net assets) get an Attractive-or-better rating.

The key takeaways are: mutual fund managers allocate too much capital to low-quality stocks and All Cap Blend ETFs hold poor quality stocks.

As detailed in “Cheap Funds Dupe Investors”, the fund industry offers many cheap funds but very few funds with high-quality stocks, or with what I call good portfolio management.

Investors need to tread carefully when considering All Cap Blend ETFs and mutual funds, as 98% of ETF assets and 99% of mutual fund assets are allocated to Neutral-or-worse rated stocks. Only 2 ETFs and 42 mutual funds in the All Cap Blend style allocate enough value to Attractive-or-better-rated stocks to earn an Attractive rating.

Laboratory Corporation of America Holdings LH is one of my favorite stocks held by All Cap Blend ETFs and mutual funds and earns my Attractive rating. Per LH’s price-to-economic book value of .77, the current market valuation implies LH’s NOPAT will permanently decrease by 23%. In contrast, LH has a strong history of profitable growth. The company has grown its NOPAT by 15% compounded annually since 1998.  Its ROIC has exceeded its WACC consistently as it has generated positive economic earnings  each of the past 13 years. This combination of a low valuation coupled with LH’s demonstrated ability to create value makes LH an Attractive stock.

athenahealth Inc. ATHN is one of my least favorite stocks held by All Cap Blend ETFs and mutual funds and earns my Dangerous rating.  ATHN is a textbook example of a good company, but a bad stock. ATHN has produced positive economic earnings each of the past five years, and, over that time, ATHN has done a pretty good job of creating value for its shareholders. However, its stock price fully reflects its past profitability and more. At $82.39/share, the stock commands a price-to-economic book value of 10.43. In DCF terms, this means ATHN must grow its NOPAT at a CAGR of 21% for the next 18 years to justify its current valuation. The past three years ATHN has grown its NOPAT by -3.1%, 3.3%, and 6.3%. The market’s expectation for future performance is remarkably different from ATHN’s recent performance. This is not to say that ATHN is a bad company, but it is a Dangerous stock.

Figures 4 and 5 show the rating landscape of all All Cap Blend ETFs and mutual funds. Our style rankings for ETFs and mutual funds report ranks all styles and highlights those that offer the best investments.

Sources: New Constructs, LLC and company filings

Review my full list of ratings and rankings along with reports on all 31 ETFs and 753 mutual funds in the All Cap Blend style.

Disclosure: I receive no compensation to write about any specific stock, sector, style or theme.