Sponsored by CFRA Research
CFRA believes investors need to dig deeper than a strong performance record when assessing ETFs. Because what’s inside will drive future returns much more than the track record. But with another strong year in the books for CFRA’s forward looking ETF ratings, many investors are getting to know just how we’re selecting funds.
In rating more than 1,1,00 equity ETFs, CFRA combines holdings-level analysis, updated daily, with fund attributes that can help investors as they look forward. This contrasts to other research providers that rely solely on a three-year track record relative to eclectic group of active and passive funds. From a holdings-perspective, CFRA’s qualitative STARS research provides a key valuation input, while S&P Global Market Intelligence’s Quality Rankings is an important risk consideration metric. In addition, CFRA includes expense ratio, bid/ask spread and technical trends as part of the fund-specific factors.
In 2017, the S&P 500 Equal Weight index rose a strong 17.8%, highlighting the investment merit of a well-diversified large-cap approach. However, CFRA's Overweight rated ETF universe climbed an even stronger 23.3% last year, 450 basis points stronger than its benchmark and ahead of the 21.6% total return for CFRA's Underweight rated ETFs. Looking back on a three-year basis, the top-rated ETFs posted an average annualized gain of 11.9%, ahead of the 9.8% for the S&P 500 Equal Weight index and the 7.5% for bottom rated ETFs. Since inception of CFRA's ETF ratings in October 2010, strong returns were also generated, as Overweight rated ETFs beat the index by 80 basis points, while Underweight ETFs lagged by more than 550 basis points. MarketScope Advisor users can see a broader performance record attached.
As of January 25, 2018 there were 30 equity ETFs that earned positive CFRA rating inputs for Performance Analytics, Risk Considerations and Cost Factor metrics.
Some were style-oriented ETFs, such as iShares Core S&P US Value (IUSV). While the IUSV looks strong for its low costs – a 0.05% expense ratio and $0.02 bid/ask spread—CFRA’s favorable view of its holdings is key driver of the rating. CFRA has buy recommendations on many of its constituents, including AT&T (T), DowDuPont (DWDP), JPMorgan Chase (JPM) and Johnson & Johnson (JNJ). In addition, IUSB’s has bullish technical trends according to our research.
Meanwhile, certain sector-focused ETFs stand out to us based on a variety of forward-looking records. One example is Fidelity MSCI Consumer Staples Index ETF (FSTA). The ETF has a modest 0.08% expense ratio, which coupled with a $0.04 bid/ask spread supports its favorable cost factors. However, we also find its holdings appealing on valuation and risk perspective. Seven of the top-10 holdings are CFRA buy or strong buy recommendations, while eight of them earn an above-average S&P Quality Ranking. Coca-Cola (KO), Procter & Gamble (PG) and WalMart (WMT) are a few attractive examples.
Neither ETF outperformed the S&P 500 in 2017 and both look more average if investors relied solely on its three-year record. Yet CFRA believes an ETF should be chosen based on what’s ahead not what occurred in the past.
Much as drivers use the front windshield more than the rearview mirror, investors should select an ETF based on forward-looking attributes. CFRA has an equal percentage of Overweight rated ETFs we like as Underweight rated funds. We think a broad lens helps to sort through potential leaders and laggards, rather than just focusing on the largest and most tenured products. To see reports on other top and bottom rated ETFs, visit the ETF screening tools on this platform.