92 Standout Funds In 46 Categories
In 1999, we built a rating system to help isolate the very best mutual funds. At the time, there were more than 12,000 funds available to investors — now there are nearly 31,300. Thankfully, our refined fund-rating system continues to help separate the wheat from the chaff.
Today, we calculate percentile ranks that compare nearly 5,000 mutual funds and exchange-traded funds (ETFs) across 110 distinct categories. How do we start with nearly 31,300 funds and end up with only 5,000?
First, we screen for a single, representative share class. Many funds have several versions of the same portfolio. For example, Putnam offers six versions of its small-cap growth fund. The differences stem from the sales charge, expense ratio, and investor qualifications. This screen, which typically isolates a fund's oldest share class, cuts the universe to about 8,300 funds.
Next, our screen requires that a fund have a five-year history, which allows us to evaluate long-term performance and risk. This screen knocks out nearly 2,300 funds, leaving about 6,000.
Finally, we screen for funds that are readily available to most subscribers. We exclude funds requiring a minimum initial investment of more than $25,000, which are typically available only to institutional investors such as pension funds. This last pass trims the count to about 5,000 mutual funds and ETFs.
Ranks are computed each month by evaluating tax efficiency and total returns over four holding periods. Our ranks also incorporate such risk-adjusted performance metrics as information ratio, which compares a fund's returns relative to a benchmark to its volatility. Importantly, because expense ratios rank among the most effective predictors of future performance, our scores also consider two expense factors.
To allow for more accurate comparisons, stock funds are grouped by investment style and the size of the companies in their portfolios. Bond funds are grouped by the type and length of maturity of their securities.
Fund ranks compare funds to group peers. For example, a score of 80 means a fund ranks better than about 80% of its peers.
With nearly 5,000 funds in our research universe, even limiting ourselves to high scorers leaves hundreds of funds that look good by the numbers. To narrow the field to a group of truly high-potential offerings, we applied a multistep screen:
• First, a fund needed to score at least 80 in our rating system. Funds making the cut: 1,037.
• Second, we focused on no-load funds. With so many good no-load funds to choose from, investors should avoid funds that levy an up-front sales charge. Funds making the cut: 895.
• Third, we screened for funds that have reasonable expense ratios relative to category norms, with most well below average. Funds making the cut: 816.
• Next, we focused on funds that rank near the top one-half of their category for three-year return. Funds making the cut: 778.
• Finally, a fund needed to be open to new investors and available directly through the fund company or at least one brokerage firm. Funds making the cut: 537.
To be sure, 537 funds is still an unwieldy number. So we sifted through the candidates, favoring low-cost funds in 46 large and popular categories. We also considered asset size and manager tenure. Below and on the next page are 92 top-ranked funds, including 35 ETFs. Notably, 30 are from Vanguard, which is widely known for its modest fund expenses. Of course, no ranking system can substitute entirely for in-depth research. A list of our very favorite picks — the 20 funds that make up our recommended fund list and Growth and Conservative Portfolios — is below.