By Todd Rosenbluth, CFRA
Investors are increasingly shifting to index-based equity ETFs, from actively managed mutual funds, benefitting from the lower fees and greater transparency.
However, CFRA thinks too many investors still conduct due diligence on ETFs the way they have long done with mutual funds — looking backward at the track record.
CFRA’s approach is different than other independent research providers as we provide a forward-looking perspective on what’s inside and the costs, since that’s what will drive an ETF in the coming weeks, months and years.
Whether the SPDR S&P 500 Index ETF (SPY), the ETF with the most assets, can continue to achieve double-digit returns as it did in 2016 and is on pace to do in 2017 has nothing to do with the fund managers’ skills at selecting stocks. SPY does a good job of tracking the widely-followed index, but has no control over how much Apple (AAPL) or ExxonMobil (XOM) is inside.
As such, determining how well it performed relative to other large-cap funds over the past three years provides an investor with little insight for what’s ahead for 2018. We think the failure of many active large-cap mutual funds to keep up with the S&P 500 index is the result of their higher fees and often poor security selection.
It is for that very reason that CFRA ranks SPY and approximately 1,100 other equity ETFs based on a combination of holdings analysis and ETF attributes. These include a review of the valuation and risk of the stocks inside the portfolio as well as the expense ratio, bid/ask spread and technical trends of the fund.
Our forward-looking ratings are updated daily to reflect any changes in our view of the holdings or of these ETF attributes. We rate mutual funds separately from ETFs and you can learn more about our mutual fund approach in a Trends & Ideas article published earlier this week, “WHY INVESTORS NEED A SECOND STAR OPINION ON MUTUAL FUNDS”.