Some Highly Rated ETFs Prove Their Worth

There are times, particularly when it comes to individual stocks, when analyst ratings do not do investors much good. Some sell-side analysts put a buy rating on a stock after it has surged and could be overvalued.

Likewise, there have been instances of analysts letting stocks incur significant drubbings before tagging those issues with sell ratings. So investors are right to be leery of analyst ratings, whether those ratings apply to stocks or exchange traded funds. Kudos to CFRA Research because as the firm pointed out in a note released earlier this week, some of its overweight-rated ETFs are performing well to start 2017.

Overweight Vs. Underweight Ranked ETFs And Their Performances

“In the first two months of 2017, the Overweight ranked ETFs had 6.30 percent total return, exceeding the 5.94 percent for the S&P 500 index,” said CFRA. “Meanwhile, the Underweight ranked ETFs gained only 4.23 percent. On a three-year and five-year total return basis, Overweight ranked ETFs outperformed the benchmark by 219 and 270 basis points, respectively, while Underweight ranked ETFs lagged by 1,206 and 1,076 basis points.”

CFRA's ratings on fixed income ETFs are proving accurate as well. Bond ETFs rated overweight or marketweight by the firm are outpacing the Bloomberg Barclays US Aggregate Bond Index over the past year while CFRA's underweight bond ETFs are trailing the widely followed bond benchmark over the past four years.

A Look At 2 Specifics

The research firm rates over 1,000 equity ETFs. One of its overweight names is the Schwab U.S. Large Cap ETF SCHX. With an annual fee of just 0.03 percent, SCHX is one of the cheapest broad market ETFs in the U.S. SCHX holds 780 stocks, significantly more than are found in the S&P 500.

The PowerShares S&P 500 Quality ETF SPHQ, which is up 5.4 percent year-to-date, is another one of CFRA's overweight ETFs.

SPHQ, which came to market in late 2005, follows the S&P 500 Quality Index. That index “tracks the performance of stocks in the S&P 500 Index that have the highest quality score, which is calculated based on three fundamental measures, return on equity, accruals ratio and financial leverage ratio,” according to PowerShares.

SPHQ “earns an Overweight ranking not only for the low risk considerations of its holdings, but also for the relative attractiveness of the constituents. The ETF, which has a net expense ratio of 0.29 percent (0.38 percent gross expense ratio), has top-10 holdings in Altria Group Inc MO, Home Depot Inc. HD, and Boeing Co. BA; all three have above-average S&P Capital IQ Quality Rankings and are undervalued according to CFRA equity analysts,” said the research firm.

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