This report shows how well Financials ETFs and mutual fund managers pick stocks. We juxtapose our Portfolio Management rating on funds, which grades managers based on the quality of the stocks they choose, with the number of good stocks available in the sector. This analysis shows whether or not ETF providers and mutual fund managers deserve their fees.
For example, if a fund has a poor Portfolio Management rating in a sector where there are lots of good stocks, that fund does not deserve the fees it charges, and investors are much better off putting money in a passively-managed fund or investing directly in the sector’s good stocks. On the other hand, if a fund has a good Portfolio Management rating in a sector where there are lots of bad stocks, then investors should put money in that fund assuming the fund’s costs are competitive.
Figure 1 shows how many good stocks, according to our nationally-recognized ratings, are in the sector and their market cap. Next, it juxtaposes the Portfolio Management ratings of the ETFs and mutual funds in the sector. We think investors can gain an advantage with our forward-looking fund ratings since past performance is not a reliable predictor of future returns.
Figure 1 shows that 92 out of the 600 stocks (only 10% of the market value) in Financials ETFs and mutual funds get an Attractive-or-better rating.
The main takeaway from Figure 1 is only 2% (1 out of 46) of ETFs allocate enough to quality stocks to earn an Attractive-or-better Portfolio Management rating. Mutual Fund managers have done even worse with 0% (0 out of 243) of mutual funds allocating enough of their assets to quality stocks to earn an Attractive-or better rating. ETF providers and mutual fund managers need to do a better job to justify their fees.
With no quality ETFs it should come as no surprise that investors are putting their money into low quality ETFs and mutual funds. However, even more troubling is that only 10% of total net assets are located in the ETFs with a Neutral Portfolio Management rating. Investors are allocating to the worst ETFs in the sector. The picture is worse for mutual fund investors as only 2% of investor assets are allocated to Neutral-rated funds. The rest sits in funds that earn a Dangerous-or-worse Portfolio Management rating.
