How To Find The Best Sector ETFs: Q2'15 In Review
Jul. 3, 2015 9:30 AM
- The large number of ETFs hurts investors more than it helps as too many options become paralyzing.
- Performance of an ETFs holdings are equal to the performance of an ETF.
- Our coverage of ETFs leverages the diligence we do on each stock by rating ETFs based on the aggregated ratings of their holdings.
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 43 different Financials ETFs and at least 188 ETFs across all sectors. Do investors need that many choices? How different can the ETFs be?
Those 43 Financials ETFs are very different. With anywhere from 20 to 556 holdings, many of these Financials 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 Staples ranks first. Energy ranks last. Details on the Best & Worst ETFs in each sector are here .
A Recipe for Paralysis By Analysis
We firmly believe ETFs for a given sector should not all be that different. We think the large number of Financials (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, is far more difficult than analyzing stocks because it means analyzing all the stocks
within each ETF. As stated above, that can be as many as 556 stocks, and sometimes even more, for one ETF.
Any investor worth his salt recognizes that analyzing the holdings of an ETF is critical to finding the best ETF. Figure 1 shows our top rated ETF for each sector in Q2'15.
Figure 1: The Best ETF in Each Sector
Sources: New Constructs, LLC and company filings
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.
PERFORMANCE OF FUND'S HOLDINGS = PERFORMANCE OF FUND
If Only Investors Could Find Funds Rated by Their Holdings
The PowerShares KBW Property & Casualty Insurance Portfolio ETF (NYSEARCA:KBWP ) is the top-rated Financials ETF and the overall best ETF of the 188 sector ETFs that we cover.
The worst ETF in Figure 1 is the SPDR S&P Telecom ETF (NYSEARCA:XTL ), which gets our Dangerous rating. One would think ETF providers could do better for this sector.
Disclosure: David Trainer and Max Lee receive no compensation to write about any specific stock, sector, or theme.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.