With an ever-growing list of similar-sounding ETFs to choose from, finding the best is an increasingly difficult task. How can investors change the game to shift the odds in their favor?
Don’t Trust ETF Labels
There are at least 81 different Technology ETFs and at least 289 ETFs across eleven sectors. Do investors need 26+ choices on average per sector? How different can the ETFs be?
Those 81 Technology ETFs are very different from each other. With anywhere from 22 to 553 holdings, many of these Technology ETFs have drastically different portfolios with differing risk profiles and performance outlooks.
The same is true for the ETFs in any other sector, as each offers a very different mix of good and bad stocks. Energy ranks first for stock selection. Utilities ranks last.
Avoiding Analysis Paralysis
I think the large number of sector ETFs hurts investors more than it helps. Manually conducting a deep analysis for every ETF is simply not a realistic option, exposing investors to insufficient analysis and missing profitable opportunities. Analyzing ETFs, with the proper diligence, is far more difficult than analyzing stocks because it means analyzing all the stocks within each ETF. As stated above, there can be as many as 553 stocks or more for one ETF.
Figure 1 shows the top-rated ETF for each sector.
Figure 1: The Best ETF in Each Sector
* Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity
Amongst the ETFs in Figure 1, Fidelity MSCI Energy Index ETF
FENY
KBWB
FXU
How to Avoid “The Danger Within”
Why do you need to know the holdings of ETFs before you buy?
You need to be sure you do not buy an ETF that might blow up. Buying an ETF without analyzing its holdings is like buying a stock without analyzing its business and finances. No matter how cheap, if it holds bad stocks, the ETF’s performance will be bad.
PERFORMANCE OF FUND’S HOLDINGS – FEES = PERFORMANCE OF FUND
If Only Investors Could Find Funds Rated by Their Holdings
Fidelity MSCI Energy Index ETF (FENY) is not only the top-rated Energy ETF but is also the overall top-rated sector ETF out of the 289 sector ETFs that my firm covers.
The worst ETF in Figure 1 is First Trust Utilities AlphaDEX Fund (FXU), which gets a very unattractive rating. One would think ETF providers could do better for this sector.
Disclosure: David Trainer, Kyle Guske II, and Italo Mendonça receive no compensation to write about any specific stock, sector, or theme.
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