Check out this week’s Danger Zone interview  with Chuck Jaffe of Money Life and MarketWatch.com.
Rydex Series Fund: Utilities Fund (RYUTX) is in the Danger Zone this week due the poor quality of its holdings and the poor performance of its sector as a whole.
We recently released our 1Q13 Sector Rankings for ETFs and mutual funds  report, and the Utilities sector comes in at second-to-last. Only two of the 47 Utilities sector funds manage to achieve even a Neutral rating, and none are Attractive or better.
RYUTX exemplifies why this sector is so poorly rated, as a whopping 89% of its value is allocated to stocks with a Neutral or worse rating. When you invest in a mutual fund, you’re investing in every stock that fund owns, and right now RYUTX owns a lot of poor stocks.
On top of that, RYUTX has an outrageously high total annual cost  of 6.49%, which mean the fund’s holdings have to outperform its benchmark by more than 6.49% every year to create any value for clients. This high a cost should be a red flag for any fund; for one with as poor holdings as RYUTX, it’s a clear sign to stay far, far away.
70% of assets in the Utilities sector are in Dangerous or worse rated funds. Clearly, too many investors are putting their money in the wrong places. This is chiefly due to the lack of research on the quality of holdings. As we’ve discussed before in Low Cost Funds Dupe Investors , the available data on fund costs is solid. Investors are generally great at allocating to cheap funds.
However, there is a serious lack of quality research, outside of New Constructs, into the holdings of ETFs and mutual funds. Instead, backward-looking research has dominated the dialogue on funds for years, telling investors to focus on historical performance rather than do their due diligence on the quality of a fund’s holdings. Only our predictive rating methodology gives investors the tools to seriously analyze the stocks they are actually buying into when they invest in a fund.
Disclosure: Sam McBride contributed to this post. Neither David Trainer nor Sam McBride receive compensation for writing about any specific stock, sector, or theme.