David Trainer | Jul 15, 2012 01:37AM ET
The Materials sector ranks fifth out of the ten sectors as detailed in my sector roadmap. It gets my Neutral rating, which is based on aggregation of ratings of 11 ETFs and 11 mutual funds in the Materials sector as of July 12, 2012.
Figure 1 shows the five best and worst-rated Materials ETFs and Figure 2 ranks from best to worst the nine Materials mutual funds that meet our liquidity standards. Not all Materials sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 30 to 156), 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 ETFs and mutual funds, 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 Materials sector, 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.
Investors should not buy any Materials ETFs or mutual funds because none get an Attractive-or-better rating. If you must have exposure to this sector, you should buy a basket of Attractive-or-better rated stocks and avoid paying undeserved fund fees. Active management has a long history of not paying off.
Figure 1: ETFs with the Best & Worst Ratings – Top 5
* Best ETFs exclude ETFs with TNA’s less than 100 million for inadequate liquidity.
Sources: New Constructs, LLC and company filings
PowerShares Dynamic Basic Materials (PYZ) is excluded from Figure 1 because its total net assets (TNA) are below $100 million and do not meet our liquidity standards.
Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5 (where available)
* Best mutual funds exclude funds with TNA’s less than 100 million for inadequate liquidity.
Sources: New Constructs, LLC and company filings
ICON Funds: ICON Materials Fund (ICBMX) and ICON Funds: ICON Materials Fund (ICBCX) are excluded from Figure 2 because their total net assets (TNA) are below $100 million and do not meet our liquidity standards.
iShares S&P North American Natural Resources Sector Index Fund (IGE) is my top-rated Materials ETF and Fidelity Select Portfolios: Fidelity Advisor Materials Fund (FMFEX) is my top-rated Materials mutual fund. Both earn my Neutral rating.
SPDR S&P Metals & Mining ETF (XME) is my worst-rated Materials ETF and ICON Funds: ICON Materials Fund (ICBAX) is my worst-rated Materials mutual fund. Both earn my Dangerous rating.
Figure 3 shows that 49 out of the 232 stocks (over 28% of the total net assets) held by Materials ETFs and mutual funds get an Attractive-or-better rating. However, there are not any Materials ETFs or Materials mutual funds that get an Attractive-or-better rating.
The takeaway is: Materials ETFs and mutual funds are not picking the right stocks and are undeserving of their fees no matter how small.
Figure 3: Materials Sector Landscape For ETFs, Mutual Funds & Stocks
Sources: New Constructs, LLC and company filings
Sources: New Constructs, LLC and company filings
Figure 5: Separating the Best Mutual Funds From the Worst Mutual Funds
Sources: New Constructs, LLC and company filings
Disclosure: I receive no compensation to write about any specific stock, sector or theme.
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