David Trainer | Apr 18, 2012 02:56AM ET
The best ETFs and mutual funds have high-quality holdings and low costs. There are few funds that have both good holdings and low costs. There are lots of cheap funds, but there are too few funds with high-quality holdings.
I think there are at least two causes for this disconnect. First, there is, in general, a lack of independent research on ETFs and funds. Second, I think it is fair to say that there is a severe lack of quality research into the holdings of mutual funds and ETFs. There should not be such a large gap between the quality of research on stocks and funds, which are simply groups of stocks.
After all, investors should care more about the quality of a fund’s holdings than its costs because the quality of a fund’s holdings is the single most important factor in determining its future performance.
The following is a summary of my top picks and pans for all sector funds. I will follow this summary with a detailed report on each sector.
Figures 1 shows the best ETF or mutual fund in each sector as of April 13, 2012.
For a full list of all ETFs and mutual funds for each sector ranked from best to worst, see my free ETF & mutual fund screener .
Figure 1: Best ETF or Mutual Fund by Sector
Only one sector fund gets my Very Attractive rating, Health Care Select Sector SPDR (XLV). Over 30% of this fund is allocated to Very Attractive stocks, including Merck & Co., Inc. (MRK) and Abbott Laboratories (ABT). Another 35%+ is allocated to Attractive stocks. About 28% is in Neutral stocks while less than 3% is in Dangerous-or-worse-rated stocks.
One of the fund’s top holding is MRK. With positive and rising economic earnings and a valuation that implies at permanent 10% decline in profits, MRK offers teriffic risk/reward.
Figure 2 shows the worst ETF or mutual fund for each sector as of April 13, 2012.
Dangerous-or-worse-rated funds have a combination of low-quality portfolios (i.e. they hold too many Dangerous-or-worse rated stocks) and high costs (they charge investors too much for the [lack of] management they provide).
Figure 2: Worst ETF or Mutual Fund by Sector
Figure 4 shows the worst ETF or mutual fund based on our Portfolio Management Rating for each sector as of April 13, 2012.
Even ignoring costs, many ETFs and mutual fund do a poor job investing money for their clients. These funds are not worth owning at any cost.
Figure 4: ETF or Mutual Fund With Lowest Quality Holdings by Sector
For every fund with a Very Dangerous Total Annual Costs Rating there is an alternative fund that offers similar exposure and holdings at a lower cost. Investors have plenty of alternatives to these over priced funds.
Figures 6 shows the worst fund in each sector according to our Total Annual Costs Rating.
Figure 6: ETF or Mutual Fund With Highest Costs by Sector
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