By David Trainer
- The large number of ETFs hurts investors more than it helps as too many options become paralyzing.
- Performance of an ETF’s holdings are equal to the performance of an ETF.
- Our coverage of ETFs leverages the diligence we do on each stock by rating ETFs based on the aggregated ratings of their holdings.
Finding the best ETFs is an increasingly difficult task in a world with so many to choose from. How can you pick with so many choices available?
Don’t Trust ETF Labels
There are at least 58 different Technology ETFs and at least 259 ETFs across 11 sectors. Do investors need 23-plus choices on average per sector? How different can the ETFs be? Those 58 Technology ETFs are very different. With anywhere from 21 to 380 holdings, many of these Technology ETFs have drastically different portfolios, creating drastically different investment implications. The same is true for the ETFs in any other sector, as each offers a very different mix of good and bad stocks. Telecom Services ranks first for stock selection. Utilities ranks last. Details on the Best & Worst ETFs in each sector are here.
How to Avoid Paralysis by Analysis
We think the large number of Technology (or any other) sector ETFs hurts investors more than it helps because too many options can be paralyzing. It’s simply not possible for the majority of investors to properly assess the quality of so many ETFs. Analyzing ETFs, done with the proper diligence is far more difficult than analyzing stocks because it means analyzing all the stocks within each ETF. As stated above, there can be as many as 380 stocks or more for one ETF. Anyone focused on fulfilling the fiduciary duty of care recognizes that analyzing the holdings of an ETF is critical to finding the best ETF.
Figure 1: The Best ETF in Each Sector
Sources: New Constructs, LLC and company filings
Amongst the ETFs in Figure 1, iShares MSCI Global Metals & Mining Producers ETF (PICK) ranks first overall, Invesco KBW Bank ETF (KBWB) ranks second, and State Street SPDR S&P Homebuilders ETF (XHB) ranks third. Fidelity MSCI Real Estate Index ETF (FREL) ranks last.