Best And Worst Q1’16: Small Cap Value ETFs, Mutual Funds And Key Holdings

By | March 14, 2016

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The Small Cap Value style ranks eleventh out of the twelve fund styles as detailed in our Q1’16 Style Ratings for ETFs and Mutual Funds report. Last quarter , the Small Cap Value style ranked tenth. It gets our Dangerous rating, which is based on aggregation of ratings of 19 ETFs and 268 mutual funds in the Small Cap Value style. See a recap of our Q4’15 Style Ratings here. Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the style. Not all Small Cap Value style ETFs and mutual funds are created the same. The number of holdings varies widely (from 13 to 1482). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Small Cap Value style should buy one of the Attractive-or-better rated mutual funds from Figure 2. Figure 1: ETFs with the Best & Worst Ratings – Top 5 Click to enlarge * Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The First Trust Mid Cap Value AlphaDEX Fund (NYSEARCA: FNK ) and the Guggenheim S&P MidCap 400 Pure Value ETF (NYSEARCA: RFV ) are excluded from Figure 1 because their total net assets are below $100 million and do not meet our liquidity minimums. Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5 Click to enlarge * Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The iShares Morningstar Small-Cap Value ETF (NYSEARCA: JKL ) is the top-rated Small Cap Value ETF and the Royce Special Equity Fund (MUTF: RSEIX ) is the top-rated Small Cap Value mutual fund. JKL earns a Neutral rating and RSEIX earns a Very Attractive rating. The Guggenheim S&P SmallCap 600 Pure Value ETF (NYSEARCA: RZV ) is the worst-rated Small Cap Value ETF and The Putnam Small Cap Value Fund (MUTF: PSLAX ) is the worst-rated Small Cap Value mutual fund. RZV earns a Dangerous rating and PSLAX earns a Very Dangerous rating. Standard Motor Products (NYSE: SMP ) is one of our favorite stocks held by RSEIX and earns a Very Attractive rating. Since 2004, Standard Motor Products has grown after-tax profit ( NOPAT ) by 19% compounded annually. Over this same time, the company has greatly improved its return on invested capital ( ROIC ) from 2% in 2004 to 13% over the last twelve months. Despite this long-term success, SMP is undervalued at current prices. At its current price of $33/share, SMP has a price-to-economic book value ( PEBV ) ratio of 0.9. This ratio means that the market expects SMP’s NOPAT to permanently decline by 10%. If Standard Motor Products can grow NOPAT by just 5% compounded annually for the next decade , the stock is worth $47/share today – a 42% upside. Raven Industries (NASDAQ: RAVN ) is one of our least favorite stocks held by ARIVX and earns a Dangerous rating. From 2005 to the last twelve months, Raven Industries has failed to grow NOPAT. Over the same time, the company’s profitability has tanked, with ROIC falling from 29% to 7%. With such poor fundamentals, it should be no surprise that RAVN is down 20% over the past decade. What may surprise you though is that RAVN remains overvalued. To justify its current price, Raven Industries must grow NOPAT by 6% compounded annually for the next 21 years . This expectation seems rather optimistic given Raven’s poor track record of profit growth. Figures 3 and 4 show the rating landscape of all Small Cap Value ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst Funds Click to enlarge Sources: New Constructs, LLC and company filings Figure 4: Separating the Best Mutual Funds From the Worst Funds Click to enlarge Sources: New Constructs, LLC and company filings D isclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, style, or theme. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Scalper1 News

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