At the beginning of the third quarter of 2014, only the Consumer Staples sector earns an Attractive-or-better 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 and Information Technology sector. These sectors house multiple 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 free 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 the top 30% of all ETFs and mutual funds earn our Attractive or better ratings.
State Street SPDR Consumer Staples Select Sector Fund ETF (XLP) is my top rated Consumer Staples fund. It gets my Very Attractive rating by allocating over 30% of its value to Attractive-or-better-rated stocks.
Wal-Mart Stores, Inc. (WMT) is one of my favorite stocks held by XLP. Due to the earnings disappointment in 2Q14, investors are presented with a great opportunity. Over the past decade, WMT has grown after-tax profit (NOPAT) by 8% compounded annually while maintaining a remarkably consistent return on invested capital (ROIC) of ~12%. Over the same time period, WMT has grown its economic earnings by 11% compounded annually. However, investors failed to remember the track record of WMT and upon the 2Q earnings announcement, the stock sold off 6%. At its current valuation of ~$76/share, WMT has a price to economic book value (PEBV) of 0.9. This ratio implies the market expects WMT’s NOPAT to permanently decline by 10%, which seems unlikely. One lackluster quarter is little more than a blip on the radar for WMT. WMT is a great buy on the dip opportunity at the moment.
