Ratings Matter For Some ETFs

A common criticism of sell-side equity analysts is that some on Wall Street wax bullish when stocks in their coverage universe are trading near new highs and turn bearish when those stocks make new lows. Said another way, some analysts' forecasts are not always predictive or profitable for investors.

Of course, there are exceptions as some analysts really do “get it.” That sentiment extends to ratings of mutual funds and exchange traded funds. Sure, there are some highly rated funds that are not deserving of those ranking and there are other funds with lofty ratings that deliver for investors.

Paying Attention Pays Off

Investors that paid close attention to CFRA Research's ETF ratings last year could have done well by focusing on the firm's Overweight ETFs while missing some potential disappointments by ignoring the lowest rated ETF's in CFRA's coverage universe.

“Whether it was the addition of $284 billion of new money for ETFs; various surveys of self-directed investors, advisors and institutional investors indicating they have increasingly used and plan to consider ETFs; and the ongoing expansion of new products from established and new entrants, it is easy to conclude last year was an excellent year for the ETF industry. Add to that list, CFRA’s top ranked equity ETFs outperformed the S&P 500 benchmark in 2016 by 399 basis points, while bottom ranked ETFs lagged by 559 basis points,” said CFRA in a note out Monday.

SCHG In Focus

The Schwab U S Large Cap Growth ETF SCHG is an example of one of CFRA's Overweight ETF's that is soaring. SCHG, which saw 2016 inflows of $484 million, is higher by nearly 6 percent year-to-date and hit a new high Monday.

SCHG is one of the cheapest growth ETFs on the market with an annual fee of just 0.04 percent, or $4 on a $10,000 investment. The Schwab growth ETF returned 6.8 percent last year.

The iShares Core S&P Total U.S. Stock Market ETF ITOT is another example of a low fee ETF that garners an Overweight rating from CFRA. That ETF is higher by almost four percent to start 2017. ITOT rose 12.6 percent last year, nudging the 12 percent returned by the S&P 500.

ITOT is one of the least expensive equity ETFs on the market today with an annual fee of just 0.03 percent. The ETF holds nearly 3,700 stocks.

“In 2016, the Overweight ranked ETFs had 15.95 percent total return, exceeding the 11.96 percent for the S&P 500 index. Meanwhile, the Underweight ranked ETFs gained only 6.37 percent. On a three-year and five-year total return basis, Overweight ranked ETFs outperformed the benchmark by 217 and 289 basis points, respectively, while Underweight ranked ETFs lagged by 1,109 and 996 basis points,” added CFRA.