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Best And Worst Q2’16: Consumer Staples ETFs, Mutual Funds And Key Holdings

The Consumer Staples sector ranks third out of the ten sectors as detailed in our Q2’16 Sector Ratings for ETFs and Mutual Funds report. Last quarter , the Consumer Staples sector ranked first. It gets our Neutral rating, which is based on aggregation of ratings of nine ETFs and 15 mutual funds in the Consumer Staples sector. See a recap of our Q1’16 Sector Ratings here . Figure 1 ranks from best to worst all nine Consumer Staples ETFs and Figure 2 shows the five best and worst rated Consumer Staples mutual funds. Not all Consumer Staples sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 16 to 115). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Consumer Staples sector 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 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 Fidelity Select Automotive Portfolio (MUTF: FSAVX ) is excluded from Figure 2 because its total net assets are below $100 million and do not meet our liquidity minimums. Fidelity MSCI Consumer Staples Index ETF (NYSEARCA: FSTA ) is the top-rated Consumer Staples ETF and fidelity Select Consumer Staples Portfolio (MUTF: FDFAX ) is the top-rated Consumer Staples mutual fund. FSTA earns a Very Attractive rating and FDFAX earns an Attractive rating. PowerShares Dynamic Food & Beverage Portfolio (NYSEARCA: PBJ ) is the worst rated Consumer Staples ETF and ICON Consumer Staples Fund (MUTF: ICRAX ) is the worst-rated Consumer Staples mutual fund. PBJ earns a Neutral rating and ICRAX earns a Very Dangerous rating. 117 stocks of the 3000+ we cover are classified as Consumer Staples stocks. Procter & Gamble (NYSE: PG ) is one of our favorite stocks held by FSTA and earns an Attractive rating. Over the past decade, Procter & Gamble has grown its after-tax profit ( NOPAT ) by 6% compounded annually. Since 2008, PG has earned a double digit return on invested capital ( ROIC ) and over the last twelve months earns an 11% ROIC. In spite of revenue declines, Procter & Gamble has generated a cumulative $64 billion in free cash flow over the past five years. However, at current prices, PG remains undervalued. At its current price of $82/share, PG has a price-to-economic book value ( PEBV ) ratio of 1.1. This ratio means that the market expects PG’s NOPAT to only grow 10% over the life of the corporation. If Procter & Gamble can grow NOPAT by 3% compounded annually for the next decade, (half the rate of the previous decade), the stock is worth $94/share today – a 15% upside. The company’s 3% dividend yield also adds to the attractiveness of PG. Mondelez International (NASDAQ: MDLZ ) is one of our least favorite stocks held by ICRAX and earns a Very Dangerous rating. MDLZ was placed in the Danger Zone in late March 2016 . Despite impressive revenue growth, Mondelez has never generated positive economic earnings . In fact, since 2008, the company’s economic earnings have declined from -$763 million to -$1.3 billion. The company’s ROIC has declined from 7% in 2009 to 5% in 2015. As we pointed out in our Danger Zone report, MDLZ likes to push focus away from the deterioration of business operations by using misleading non-GAAP metrics that remove many standard operating costs. Worst of all, MDLZ is significantly overvalued. To justify its current price of $42/share, MDLZ must grow NOPAT by 10% compounded annually for the next 17 years . The expectations embedded in the stock price are simply too high considering the decline in profits and the corporate governance risk related to the company’s reliance on non-GAAP measures of performance. Figures 3 and 4 show the rating landscape of all Consumer Staples 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 Mutual 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, sector 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.

Best And Worst Q2’16: Consumer Discretionary ETFs, Mutual Funds And Key Holdings

The Consumer Discretionary sector ranks fifth out of the ten sectors as detailed in our Q2’16 Sector Ratings for ETFs and Mutual Funds report. Last quarter , the Consumer Discretionary sector ranked fifth as well. It gets our Neutral rating, which is based on aggregation of ratings of 13 ETFs and 19 mutual funds in the Consumer Discretionary sector. See a recap of our Q1’16 Sector Ratings here . Figures 1 and 2 show the five best and worst rated ETFs and mutual funds in the sector. Not all Consumer Discretionary sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 25 to 389). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Consumer Discretionary sector 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 PowerShares Dynamic Retail Portfolio (NYSEARCA: PMR ), PowerShares S&P SmallCap Consumer Discretionary Portfolio (NASDAQ: PSCD ), and Guggenheim S&P 500 Equal Weight Consumer Discretionary ETF (NYSEARCA: RCD ) 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 ICON Consumer Discretionary Fund (MUTF: ICCCX ), Rydex Series Leisure Fund (RYLIX, RYLAX) are excluded from Figure 2 because their total net assets are below $100 million and do not meet our liquidity minimums. PowerShares Dynamic Leisure & Entertainment Portfolio (NYSEARCA: PEJ ) is the top-rated Consumer Discretionary ETF and Fidelity Select Leisure Portfolio (MUTF: FDLSX ) is the top-rated Consumer Discretionary mutual fund. PEJ earns a Very Attractive rating and FDLSX earns an Attractive rating. SPDR S&P Retail ETF (NYSEARCA: XRT ) is the worst rated Consumer Discretionary ETF and Rydex Series Retailing Fund (MUTF: RYRTX ) is the worst-rated Consumer Discretionary mutual fund. XRT earns a Neutral rating and RYRTX earns a Very Dangerous rating. 451 stocks of the 3000+ we cover are classified as Consumer Discretionary stocks. Carnival Corporation (NYSE: CCL ) is one of our favorite stocks held by PEJ and earns an Attractive rating. Since 1998, Carnival has grown after-tax profit ( NOPAT ) by 6% compounded annually. The company currently earns a 7% return on invested capital ( ROIC ), which is improved from the 4% earned in 2013. Over the past five years, Carnival has generated a cumulative $8 billion in free cash flow ( FCF ). Best of all, CCL is currently undervalued. At its current price of $49/share, CCL has a price-to-economic book value ( PEBV ) ratio of 1.0. This ratio means that the market expects Carnival’s NOPAT to never meaningfully grow from current levels. If Carnival can grow NOPAT by just 4% compounded annually for the next decade , the stock is worth $68/share today – a 39% upside. Amazon.com (NASDAQ: AMZN ) remains one of our least favorite stocks held by RYRTX and earns a Dangerous rating. Over the past decade, Amazon’s economic earnings have declined from $242 million to -$508 million. The company’s ROIC has declined from 27% in 2005 to 6% in 2015, which represents a clear sign that Amazon’s low margin, grow at all costs business strategy has been an inefficient use of capital. Worst of all, the expectations baked in AMZN already imply the company will be wildly profitable. To justify the current stock price of $667/share, AMZN must grow NOPAT by 22% compounded annually for the next 20 years . In this scenario, 20 years from now, Amazon would be generating over $8 trillion in revenue. Such expectations seem irrationally exuberant and make AMZN one to avoid. Figures 3 and 4 show the rating landscape of all Consumer Discretionary 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 Mutual 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, sector 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.

How To Avoid The Worst Style ETFs: Q1’16

Question: Why are there so many ETFs? Answer: ETF providers tend to make lots of money on each ETF so they create more products to sell. The large number of ETFs has little to do with serving your best interests. Below are three red flags you can use to avoid the worst ETFs: Inadequate Liquidity This issue is the easiest issue to avoid, and our advice is simple. Avoid all ETFs with less than $100 million in assets. Low levels of liquidity can lead to a discrepancy between the price of the ETF and the underlying value of the securities it holds. Plus, low asset levels tend to mean lower volume in the ETF and larger bid-ask spreads. High Fees ETFs 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 ETFs with total annual costs below 0.48%, which is the average total annual cost of the 298 U.S. equity Style ETFs we cover. The weighted average is slightly lower at 0.17%, which highlights how investors tend to put their money in ETFs with low fees . Figure 1 shows that the AdvisorShares Madrona Domestic ETF (NYSEARCA: FWDD ) is the most expensive style ETF and the Schwab U.S. Large Cap (NYSEARCA: SCHX ) is the least expensive. Absolute Shares Trust ( WBIB , WBID , WBIC , and WBIG ) provides four of the most expensive ETFs while Schwab ( SCHX and SCHB ) and Vanguard ( VOO and VTI ) ETFs are among the cheapest. Figure 1: 5 Least and Most Expensive Style ETFs Click to enlarge Sources: New Constructs, LLC and company filings Investors need not pay high fees for quality holdings. The State Street SPDR S&P 500 Buyback ETF (NYSEARCA: SPYB ) earns our Very Attractive rating and has low total annual costs of only 0.39%. On the other hand, a fund such as the iShares Core U.S. Growth ETF (NYSEARCA: IUSV ) holds poor stocks. No matter how cheap an ETF (0.08% TAC), if it holds bad stocks, its performance will be bad. The quality of an ETFs holdings matters more than its price. Poor Holdings Avoiding poor holdings is by far the hardest part of avoid bad ETFs, but it is also the most important because an ETFs performance is determined more by its holdings than its costs. Figure 2 shows the ETFs within each style with the worst holdings or portfolio management ratings . Figure 2: Style ETFs with the Worst Holdings Click to enlarge Sources: New Constructs, LLC and company filings PowerShares ( EQAL , PXMV , and EQWS ) appears more often than any other providers in Figure 2, which means that they offer the most ETFs with the worst holdings. The ProShares Ultra Telecommunications ETF (NYSEARCA: LTL ) is the worst rated ETF in Figure 2. The PowerShares Russell MidCap Pure Value ETF (NYSEARCA: PXMV ), the PowerShares Russell 2000 Equal Weight ETF ( EQWS ), the Vanguard Russell 2000 Growth Index Fund (NASDAQ: VTWG ), the Global X Super Dividend U.S. ETF (NYSEARCA: DIV ), and the Guggenheim S&P Small Cap 600 Pure Value ETF (NYSEARCA: RZV ) also earn a Dangerous predictive overall rating, which means not only do they hold poor stocks, they charge high total annual costs. Our overall ratings on ETFs are based primarily on our stock ratings of their holdings. The Danger Within Buying an ETF without analyzing its holdings is like buying a stock without analyzing its business and finances. Put another way, research on ETF holdings is necessary due diligence because an ETF’s performance is only as good as its holdings’ performance. PERFORMANCE OF ETFs HOLDINGs = PERFORMANCE OF ETF Disclosure: 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.