Best And Worst Q3'16: Large Cap Value ETFs, Mutual Funds And Key Holdings

The Large Cap Value style ranks second out of the twelve fund styles as detailed in our Q3’16 Style Ratings for ETFs and Mutual Funds report. Last quarter, the Large Cap Value style ranked first. It gets our Neutral rating, which is based on an aggregation of ratings of 45 ETFs and 891 mutual funds in the Large Cap Value style. See a recap of our Q2’16 Style Ratings here.

Figures 1 and 2 show the five best and worst rated ETFs and mutual funds in the style. Not all Large Cap Value style ETFs and mutual funds are created the same. The number of holdings varies widely (from 18 to 920). This variation creates drastically different investment implications and, therefore, ratings.

Investors seeking exposure to the Large Cap Value style 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

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* Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity.

Sources: New Constructs, LLC and company filings

Four ETFs (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

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* Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity.

Sources: New Constructs, LLC and company filings

Aston/Cornerstone Large Cap Value Fund (RVALX, AAVIX) is excluded from Figure 2 because its total net assets are below $100 million and do not meet our liquidity minimums.

PowerShares Dynamic Large Cap Value Portfolio (NYSEARCA:PWV) is the top-rated Large Cap Value ETF and AllianzGI NFJ Dividend Value Fund (MUTF:ANDVX) is the top-rated Large Cap Value mutual fund. Both earn a Very Attractive rating.

iShares Select Dividend ETF (NYSEARCA:DVY) is the worst rated Large Cap Value ETF and Sims Total Return Fund (MUTF:SIMFX) is the worst rated Large Cap Value mutual fund. DVY earns a Neutral rating and SIMFX earns a Very Dangerous rating.

Intel Corporation (NASDAQ:INTC) is one of our favorite stocks held by VLUE and earns an Attractive rating. Since 2006, Intel has grown after-tax profit (NOPAT) by 11% compounded annually. Intel earns a top-quintile 15% return on invested capital (ROIC) and over the past five years has generated $27.6 billion in free cash flow. Despite impressive profit growth, shares remain undervalued. At its current price of $35/share, INTC has a price-to-economic book value (PEBV) ratio of 1.1. This ratio means that the market expects Intel’s NOPAT to grow by only 10% over its remaining corporate life. If Intel can grow NOPAT by just 5% compounded annually over the next decade, the stock is worth $44/share today – a 26% upside.

Hill-Rom Holdings (NYSE:HRC) is one of our least favorite stocks held by PMDAX and earns a Dangerous rating. Over the past decade, HRC’s NOPAT has declined by 4% compounded annually. The company’s ROIC has declined from 12% in 2005 to a bottom-quintile 5% over the last twelve months. Despite the deterioration of business operations, HRC remains priced for significant profit growth. To justify its current stock price of $58/share, HRC must grow NOPAT by 11% compounded annually over the next 11 years. This scenario seems to be overly optimistic given the decline in NOPAT since 1998.

Figures 3 and 4 show the rating landscape of all Large Cap Value ETFs and mutual funds.

Figure 3: Separating the Best ETFs From the Worst Funds

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Sources: New Constructs, LLC and company filings

Figure 4: Separating the Best Mutual Funds From the Worst Funds

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Sources: New Constructs, LLC and company filings

This article originally published here on August 1, 2016.

Disclosure: David Trainer and Kyle Martone 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.