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How To Avoid The Worst Style Mutual Funds: Q4’15

Summary The large number of mutual funds has little to do with serving your best interests. Below are three red flags you can use to avoid the worst mutual funds. The following presents the least and most expensive style mutual funds as well as the worst overall style mutual funds per our Q4’15 style ratings. Question: Why are there so many mutual funds? Answer: Mutual fund providers tend to make lots of money on each fund so they create more products to sell. The large number of mutual funds has little to do with serving investors’ best interests. Below are three red flags investors can use to avoid the worst mutual funds: Inadequate Liquidity This issue is the easiest issue to avoid, and our advice is simple. Avoid all mutual funds with less than $100 million in assets. Low levels of liquidity can lead to a discrepancy between the price of the mutual fund and the underlying value of the securities it holds. Plus, low asset levels tend to mean lower volume in the mutual fund and larger bid-ask spreads. High Fees Mutual funds should be cheap, but not all of them are. The first step here is to know what is cheap and expensive. To ensure you are paying at or below average fees, invest only in mutual funds with total annual costs below 1.92%, which is the average total annual cost of the 5514 U.S. equity style mutual funds we cover. Figure 1 shows the most and least expensive style mutual funds. Rydex provides four of the most expensive mutual funds while Vanguard mutual funds are among the cheapest. Figure 1: 5 Least and Most Expensive Style Mutual Funds (click to enlarge) Sources: New Constructs, LLC and company filings Investors need not pay high fees for quality holdings. The Calvert Large Cap Core Portfolio (MUTF: CMIIX ) earns our Very Attractive rating and has low total annual costs of only 1.04%. On the other hand, the Fidelity Spartan Mid Cap Index Fund (MUTF: FSMDX ) earns our Neutral rating because it holds poor stocks. No matter how cheap a mutual fund, if it holds bad stocks, its performance will be bad. The quality of a mutual fund’s holdings matters more than its price. Poor Holdings Avoiding poor holdings is by far the hardest part of avoiding bad mutual funds, but it is also the most important because a mutual fund’s performance is determined more by its holdings than its costs. Figure 2 shows the mutual funds within each style with the worst holdings or portfolio management ratings . Figure 2: Style Mutual Funds with the Worst Holdings (click to enlarge) Sources: New Constructs, LLC and company filings Professionally Managed Portfolios appears more often than any other providers in Figure 2, which means that they offer the most mutual funds with the worst holdings. Our overall ratings on mutual funds are based primarily on our stock ratings of their holdings. The Danger Within Buying a mutual fund without analyzing its holdings is like buying a stock without analyzing its business and finances. Put another way, research on mutual fund holdings is necessary due diligence because a mutual fund’s performance is only as good as its holdings’ performance. Barron’s agrees . PERFORMANCE OF MUTUAL FUND’s HOLDINGs = PERFORMANCE OF MUTUAL FUND Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, style, or theme.

The NASDAQ 100: Pressured For All The Wrong Reasons, Buy QQQ

The NASDAQ 100 Index has been pressured of late along with the broader stock market. The catalysts have been the impending Fed action, lower energy prices and concern about high-yield debt and emerging markets. However, these catalysts are hardly direct risks for the 100 largest companies found within the NASDAQ 100 and QQQ. As a result, I see this weakness as a special opportunity to purchase these stocks at unwarranted discount via acquisition of QQQ. Fear has spread across the market. Major business media has raised the specter of a Fed rate hike that could stir trouble for emerging markets and high-yield debt. While it’s true that higher interest rates pressure borrowers on the margins, they should not immediately bankrupt them all. That is unless panic is pushed to the populace and investors immediately demand even greater yield for the debt that helps to sustain those fringe borrowers. Nevertheless, I see an opportunity here as the PowerShares QQQ Trust ETF ( NASDAQ: QQQ ) is being pressured for all the wrong reasons. The NASDAQ 100 has already been discounted by this issue and concern about lower energy prices, despite a lack of direct exposure to either. And there is a chance the NASDAQ 100 could sink further on these concerns this week. I would see any further decline as a very special opportunity, which I expect smart money would pounce upon, driving the QQQ to bounce higher not long thereafter. Indeed, the move higher may already be underway. Thus, I suggest using this wrongfully placed weakness as an opportunity to acquire the top NASDAQ stocks at discount by using QQQ. 1-Month Chart of QQQ at Seeking Alpha You can see in this 1-month chart of QQQ that the NASDAQ 100 Index has been under extraordinary pressure of late. The cause has been the same for all stocks, as evidenced by the moves of the SPDR S&P 500 Trust ETF (NYSE: SPY ) and the SPDR Dow Jones Industrial Average ETF (NYSE: DIA ). First, it is important to note the recent impact of lower energy prices. As America has charged toward energy independence, the energy sector has become a more important driver of American GDP. Thus, as energy prices have declined steeply and swiftly, the economies of the South and Midwest have been impacted. Energy stocks have been impacted as well, as energy producers and suppliers see smaller profit margins and are pressured to reduce capital spending. Some may be coming under financial stress as prices have fallen even further. But the NASDAQ 100 and our proxy for it, QQQ, are hardly exposed. Therefore this macro factor pressuring all stocks opens an opportunity to buy QQQ at misplaced discount. Looking to the factor of high-yield and emerging market exposure, the companies within the NASDAQ 100 are the 100 largest stocks mostly in the technology sector and including biotechnology. The largest of all firms are not usually fringe borrowers, and companies that fall out of economic favor tend to be replaced within the large stock market indexes composed of the blue chips before long. They are not borrowers on the fringe, and so the high-yield issue should not affect them. In fact, these larger companies may benefit from the failures and distressed asset sales of others as they gain market share and acquire strategic assets on the cheap. QQQ’s Top 10 Holdings % of Assets as of October 30 Apple (NASDAQ: AAPL ) 12.83% Microsoft (NASDAQ: MSFT ) 7.92 Amazon.com (NASDAQ: AMZN ) 5.51 Alphabet (NASDAQ: GOOG ) 4.60 Facebook (NASDAQ: FB ) 4.34 Alphabet (NASDAQ: GOOGL ) 4.02 Intel (NASDAQ: INTC ) 3.03 Gilead Sciences (NASDAQ: GILD ) 2.99 Cisco Systems (NASDAQ: CSCO ) 2.76 Comcast Corporation (NASDAQ: CMCSA ) 2.49 The top 10 holdings of QQQ are a who’s who of American technology, and also include a major biotechnology firm and e-commerce retailer. These are not companies starving for capital or finding it hard to come by. Thus, a quarter point rise in the benchmark interest rate should not burden them, nor should a full point increase over the course of the next year, should that result. Thus, as QQQ has come down, if these individual stocks have also fallen and are individually sporting strong alpha drivers, they should likely be purchased as well. The point is that we must study the details when macro drivers impact the broad stock market, because these broad moves in equities can open up opportunities in specific sectors of the market and in specific stocks. In this case, I suggest investors can benefit by taking stakes in the high-technology behemoths of America via QQQ. The security reflects a misplaced discounting by the drivers of fear and concern about oil prices, high-yield debt and emerging market risk. I cover the market and sectors of it regularly, along with other topics, and invite interested parties to follow my column here at Seeking Alpha .

How High Is High? How Low Is Low?

How high is high? When asking this question it would also be wise to ponder the following, how low is low? Markets are capable of making extreme moves and we should remember trees don’t grow to the sky and markets don’t go up forever. As someone who has traded commodities for decades I would strongly recommend anyone considering jumping into the super high risk snake pit of commodity trading to steer clear of it. While I have had victories I have also gone through a slew of painful losses and been bludgeoned by markets and price swings that have defied all logic. Adding to a trader’s pain and woes is that when you are caught on the bad side of an ugly trade the speed that a vicious market can dish out its brutal assault is usually extremely underestimated. After over 30 years of trading commodities I will flat out state without any reservations that lies and manipulation run rampant. If you think anyone is looking out for the small independent trader in the stock market or commodity market you are wrong. A recent article caught my interest; it said: It is always darkest before the dawn. In other words, the energy market could see crude-oil prices tumble further in the coming days after closing near seven-year lows. January West Texas Intermediate crude tumbled $2.32, or 5.8%, to settle at $37.65 a barrel. At least one chart pattern followed by technical analysts is pointing to more pain for the WTI contract as oil tilted below $37 a barrel in early Tuesday’s trade. Talk has surfaced of 20 dollar oil at the same time some analyst said it is time for investors to jump in and “pick a bottom” pointing out energy stocks are now a bargain. History has shown that markets defy logic and our opinions are often wrong. Five years ago few market gurus predicted oil would trade at such low prices today. It is difficult to say where the price of oil will be next month. After asking the question of how high is high I must also ask, how low is low? Markets can make extreme or wild moves that charts often are unable to predict. This means it is both dangerous and difficult to pick a market top or bottom. Various technical trading systems while indicating an overbought or oversold market fail when asked to answer these two questions that would make us infallible and legendary investors. Today markets have added a couple new dimensions that will play an interesting role in just how violent and savage price swings are going forward. One of those is that computers now do a great deal of the trading and they are programmed to prey on the weaknesses of human trader using computing programs that exploit where stops are placed, this improves their ability to wash the weak out of their positions. Another factor is many people have grown far to complacent. The “buy the dip” mentality and the idea that the central banks coupled with the too big to fail financial institutions will keep these distorted markets elevated has become entrenched in the minds of many investors. This has lessened the importance of economic fundamentals and the question of how sustainable this market is. It has also put on the back-burner the question and issue of, how high is high. I have seen and heard far too many comments by those bullish on higher equity prices and ever higher markets basing their strategy on a policy of “don’t fight the Fed” and “buy the dips.” While this has worked since 2009 it is no guarantee that it will continue to produce positive results in the future. The “buy the dip mantra” will prove very costly when a real drop in the market does occur. A saying often used cautions traders they should never try to catch a falling knife. One problem we face in the current stock market is a lack of traders holding short positions. Several of the stocks that were recently on strong uptrends appear at heart to be fundamentally unstable and may have been driven higher by bears capitulating and buying back their positions rather than market fundamentals. We have witnessed massive moves in several speculative stocks like Amazon (NASDAQ: AMZN ), Tesla (NASDAQ: TSLA ), and Netflix (NASDAQ: NFLX ) that are hard to defend by any other reasoning than shorts being squeezed out of the market. It is logical to think the higher a market goes the more vulnerable it becomes to a major violent decline or sudden savage downward price moves. A lack of short positions will bode poorly for the market if it falls rapidly because in such a situation as shorts take profit and buy back their positions they act as a floor under the market giving it support. The floor under this market is questionable and with contagion a growing concern it is understandable that junk bonds have begun to take a beating. The point of this post is to remind all of us the world of investing is a dangerous place and that much of how people react to events depends on how things are set up or how the cards are stacked when things happen, develop, and unfold. We often see that market reaction has more to do with timing and perception rather than being driven by reality. The economy tends to develop loops that feed back upon themselves, to this market driver we must add cross border money flows, central bank intervention, currency manipulation, and derivatives. This is only part of the list of pitfalls we face when we develop expectations that drive prices. To top things off we should recognize that at any time an unexpected black swan crisis is always lurking in the wings. This reinforces the idea that we should remain humble in trying to answer the questions of, how high is high, and how low is low. I have learned some valuable lessons over the years: markets don’t go in just one direction, values constantly shift, and after you lose your money it is to late.