Two-Step Process Finds Top ETFs

9/15/2014


Our fund-rating system favors low-cost funds with solid track records, while our Quadrix stock-rating system favors stocks with strong fundamentals and reasonable valuations. By using the systems in concert, we uncovered nine top exchange-trade funds (ETFs).

We used Quadrix to evaluate ETF portfolios based on their individual holdings. Quadrix's predictive power gives us increased confidence when gauging a fund's total-return potential.

9 TOP EXCHANGE-TRADED FUNDS
We screened for ETFs with outstanding scores in our fund-rating system and underlying holdings with strong scores in our Quadrix® stock-rating system.
Fund
Rating
Weighted Avg.
Quadrix Score
% Of
Assets
With
Overall
Above 80
Exp.
Ratio
(%)
Fund Category
ETF (Price; Ticker)
Overall
Value
Style
Large-cap
WisdomTree Earnings 500
($70; EPS)
97
69
64
34
0.28
Blend
Vanguard Mega Cap Growth
($78; MGK)
96
68
49
40
0.11
Growth
PowerShares Dyn. Large Cap
Val. ($31; PWV)
98
78
79
51
0.59
Value
Midcap
WisdomTree MidCap Earnings
($91; EZM)
93
66
63
29
0.38
Blend
PowerShares DWA Momentum
($40; PDP)
97
71
48
41
0.74
Growth
iShares Morningstar Mid-Cap
Val. ($124; JKI)
95
66
71
33
0.30
Value
Small-cap
iShares Core S&P Small-Cap
($109; IJR)
97
60
56
20
0.14
Blend
SPDR S&P 600 Small Cap Gro.
($176; SLYG)
94
62
51
20
0.25
Growth
Guggen. S&P MidCap 400 Pure
Val. ($54; RFV)
97
67
75
35
0.38
Value

Finding the perfect ETF is an impossible task, as no fund excels in all factors that go into our rating systems. Still, for the table above, we indentified nine truly high-potential funds that possess several key qualities:

• Outstanding scores in our fund-rating system. All nine funds earn scores of at least 93, meaning they rank better than about 93% of their peers. Percentile ranks, which cover nearly 5,000 mutual funds and ETFs spanning 110 categories, are calculated monthly using total returns, expense ratios, tax-efficiency, and risk-adjusted performance.

• Average scores for Quadrix Overall and Value — the two most effective scores in our stock-rating system — that exceed peer-group averages. In addition, all but two have more assets in stocks with Overall scores above 80 than the category average. Weighted averages are computed using Quadrix scores for each stock in a portfolio, weighting the scores based on the percentage of ETF assets in each stock.

• Returns that outstrip peers. All nine ETFs have outperformed their categories based on one- , three- , and five-year total returns.

• Reasonable expense ratios — a solid predictor of relative performance. The nine funds average expense ratios of only 0.35%, with two funds charging less than 0.15%.

PowerShares Dynamic Large Cap Value ($31; PWV) holds 58 stocks and has a weighted-average Overall score of 78 and Value score of 79. Roughly 51% of assets are in stocks with Overall scores above 80, versus 27% for its peers. The ETF, up 10.2% this year, earns a fund score of 98.


Guggenheim S&P MidCap 400 Pure Value ($54; RFV) is up 7.3% in 2014, ranking it among the top 1% of its peers. The ETF earns a weighted-average Overall score of 67, and 35% of assets are in stocks with Overall scores above 80. The fund score is 97.

OUR RECOMMENDED MUTUAL FUNDS
If you want to mimic our recommended Growth or Conservative Portfolios, purchase the funds listed below in the proportion suggested by the target weights.
Year-To-Date *
--- % Of Portfolio ---
 
Fund (Price; Ticker)
Return
(%)
Rank
Conser-
vative
(%)
Growth
(%)
Fund
Rating †
Artisan International ($31; ARTIX)
1.4
C
9
9
91
Dreyfus Midcap Index ($39; PESPX)
7.1
C
0
0
46
Dreyfus Small Cap Stock Index
($30; DISSX)
0.5
C
0
0
93
Homestead Small Company
($37; HSCSX)
1.1
C
5
8
69
iShares MSCI EAFE Small-Cap ETF
($50; SCZ)
(0.3)
E
7
8
94
PIMCO Total Return ETF
($109; BOND)
5.0
A
6
0
NA
T. Rowe Price Divers. Small-Cap Growth
($26; PRDSX)
2.2
A
9
9
99
T. Rowe Price Value
($37; TRVLX)
10.0
A
10
11
83
Thompson Bond ($12; THOPX)
3.2
A
6
0
94
Vanguard 500 Index ($184; VFINX)
9.0
B
7
8
82
Vanguard Dividend Growth
($23; VDIGX)
6.7
D
10
10
73
Vanguard GNMA ($11; VFIIX)
4.7
A
0
0
95
Vanguard Growth Index
($52; VIGRX)
9.1
A
11
11
92
Vanguard High-Yield Corp. ($6; VWEHX)
4.9
B
5
6
92
Vanguard Inter.-Term Tax-Exempt
($14; VWITX)
5.8
B
0
0
86
Vanguard Selected Value
($30; VASVX)
6.7
D
7
10
100
Vanguard Short-Term Invest.-Grade
($11; VFSTX)
1.6
A
0
0
100
Vanguard Total Bond Mkt. Index
($11; VBMFX)
4.0
D
0
0
50
Vanguard Wellesley Income
($26; VWINX)
6.1
A
0
0
97
Vanguard Wellington ($40; VWELX)
7.2
A
8
10
96

* Year-to-date ranks through Sept. 9 from Morningstar, comparing performance among funds with same objectives. A = top 20%; B = next 20%; C= middle 20%; D = next 20%; E = bottom 20%.
  Fund ratings are percentile ranks based on our fund-rating system.


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