For the second quarter of 2014, only three sectors manage to even earn a Neutral rating. My sector ratings are based on the aggregation of my fund ratings for every ETF and mutual fund in each sector.
Investors looking for sector funds that hold quality stocks should look no further than the Consumer Staples or Financials sector. Only these sectors house Attractive-or-better rated funds. Figures 6 and 7 provide details. The primary driver behind an Attractive fund rating is good portfolio management, or good stock picking, with low total annual costs
Note that the Attractive-or-better Predictive ratings do not always correlate with Attractive-or-better total annual costs. This fact underscores that (1) low fees can dupe investors and (2) investors should invest only in funds with good stocks and low fees.
See Figures 4 through 13 for a detailed breakdown of ratings distributions by sector. See my ETF & mutual fund screener for rankings, ratings and free reports on 7000+ mutual funds and 400+ ETFs. My fund rating methodology is detailed fund ratings.
All of my reports on the best & worst ETFs and mutual funds in every sector and investment style are available here.
Figure 1: Ratings For All Sectors
Source: New Constructs, LLC and company filings
To earn an Attractive-or-better Predictive Rating, an ETF or mutual fund must have high-quality holdings and low costs. Only five sector ETFs and mutual funds meet these requirements, which is only 0.6% of all sector ETFs and mutual funds.
Fidelity MSCI Consumer Staples Index ETF (FSTA) is my top Consumer Staples ETF. It earns my Attractive rating by allocating over 40% of its value to Attractive-or-better-rated stocks.
Wal-Mart Stores, Inc. is one of my favorite stocks held by FSTA. WMT earns my Attractive rating. WMT has grown its economic earnings by 9% compounded annually over the past decade. The retailer has earned a double-digit return on invested capital (ROIC) in every year of our model going back to 1998. Usually one has to pay a premium for a blue chip stock like WMT, but it’s currently very undervalued. At its current valuation of ~$76/share, WMT has a market-implied growth appreciation period (GAP) of less than one year. A more reasonable GAP for a Consumer Staples company would be between 15 and 20 years. If we give WMT credit for 15 years of profit (NOPAT) growth at a long-term rate of 6%, the stock has a fair value of over $150/share today.
