Best And Worst Q4’15: Large Cap Value ETFs, Mutual Funds And Key Holdings
Summary The Large Cap Value style ranks first in Q4’15. Based on an aggregation of ratings of 44 ETFs and 855 mutual funds. DIA is our top-rated Large Cap Value style ETF and FVSAX is our top-rated Large Cap Value style mutual fund. The Large Cap Value style ranks first out of the twelve fund styles as detailed in our Q4’15 Style Ratings for ETFs and Mutual Funds report. Last quarter , the Large Cap Value style ranked first as well. It gets our Attractive rating, which is based on an aggregation of ratings of 44 ETFs and 855 mutual funds in the Large Cap Value style. See a recap of our Q3’15 Style Ratings here. Figures 1 and 2 show the five best and worst-rated ETFs and mutual funds in the style. Not all Large Cap Value style ETFs and mutual funds are created the same. The number of holdings varies widely (from 17 to 1000). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Large Cap Value style should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 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 NASDAQ Rising Div Achiev ETF (NASDAQ: RDVY ), the iShares Enhanced US Large-Cap ETF (NYSEARCA: IELG ) and the State Street SPDR Russell 1000 Low Volatility ETF (NYSEARCA: LGLV ) are excluded from Figure 1 because its 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 State Street SPDR Dow Jones Industrial Average ETF (NYSEARCA: DIA ) is the top-rated Large Cap Value ETF and the Fidelity Rutland Square Trust II: Strategic Advisers Value Fund (MUTF: FVSAX ) is the top-rated Large Cap Value mutual fund. Both earn a Very Attractive rating. The Guggenheim S&P 500 Pure Value ETF (NYSEARCA: RPV ) is the worst-rated Large Cap Value ETF and the Dunham Alternative Income Fund (MUTF: DAALX ) is the worst-rated Large Cap Value mutual fund. RPV earns our Neutral rating while DAALX earns our Very Dangerous rating. PACCAR Inc. (NASDAQ: PCAR ) is one our favorite stocks held by Large Cap Value ETFs and mutual funds and earns our Very Attractive rating. Since 2011, PACCAR has grown after-tax profits ( NOPAT ) by 10% compounded annually. During the same time frame, PACCAR improved its return on invested capital ( ROIC ) from 17% to a top quintile 21%. Despite the strong fundamentals, the stock is down 22% year-to-date, which has left shares undervalued. At its current price of $50/share, the company has a price to economic book value ( PEBV ) ratio of 1.0. This ratio implies that the market expects PACCAR’s NOPAT to never meaningfully grow from current levels. If PACCAR can grow NOPAT by 8% compounded annually for the next 10 years , the stock is worth $64/share today – a 28% upside. Unum Group (NYSE: UNM ) is one of our least favorite stocks held by RPV and earns our Dangerous rating. Since 2010, Unum’s NOPAT has declined by 17% compounded annually on the heels of NOPAT margin falling from 9% to 4% over the same time frame. The company currently earns a bottom quintile ROIC of 3%, which is well below the 8% earned in 2010. While UNM is down nearly 5% this year, shares remain priced for exceptional profit growth. To justify its current price of $36/share, Unum must grow NOPAT by 10% compounded annually for the next 17 years. This expectation seems overly optimistic given Unum’s inability to grow profits over the past five years. Figures 3 and 4 show the rating landscape of all Large Cap Value ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst ETFs (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 Thaxston McKee receive no compensation to write about any specific stock, style, or theme.