David Trainer: The Consumer Discretionary sector ranks third out of the ten sectors as detailed in my Sector Rankings for ETFs and Mutual Funds report. It gets my Neutral rating, which is based on aggregation of ratings of 18 ETFs and 21 mutual funds in the Consumer Discretionary sector as of January 13, 2014. Prior reports on the best & worst ETFs and mutual funds in every sector are here.
Figure 1 ranks from best to worst the ten Consumer Discretionary ETFs that meet our liquidity standards and Figure 2 ranks from best to worst the ten Consumer Discretionary mutual funds that meet our liquidity standards. Not all Consumer Discretionary sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 25 to 372), which creates drastically different investment implications and ratings. The best ETFs and mutual funds allocate more value to Attractive-or-better-rated stocks than the worst ETFs and mutual funds, which allocate too much value to Neutral-or-worse-rated stocks.
To identify the best and avoid the worst ETFs and mutual funds within the Consumer Discretionary sector, investors need a predictive rating based on (1) stocks ratings of the holdings and (2) the all-in expenses of each ETF and mutual fund. Investors need not rely on backward-looking ratings. My fund rating methodology is detailed here.
Investors should not buy any Consumer Discretionary ETFs or mutual funds because none get an Attractive-or-better rating. If you must have exposure to this sector, you should buy a basket of Attractive-or-better rated stocks and avoid paying undeserved fund fees. Active management has a long history of not paying off.
Figure 1: ETFs with the Best & Worst Ratings – Top 5
* Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity.
Sources: New Constructs, LLC and company filings
PowerShares Dynamic Retail (NYSEARCA:PMR), PowerShares Dynamic Consumer Discretionary (NYSEARCA:PEZ) and Fidelity MSCI Consumer Discretionary Index ETF (FDIS) are excluded from Figure 1 because its total net assets (TNA) are below $100 million and do not meet our liquidity standards.