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The Small Cap Value style ranks tenth out of the twelve fund styles as detailed in our Q1’19 Style Ratings for ETFs and Mutual Funds report. Last quarter, the Small Cap Value style ranked eleventh. It gets our Unattractive rating, which is based on an aggregation of ratings of 19 ETFs and 252 mutual funds in the Small Cap Value style. See a recap of our Q4’18 Style Ratings here.
Figure 1 ranks from best to worst the seven Small Cap Value ETFs that meet our liquidity standards and Figure 2 shows the five best and worst-rated Small Cap Value mutual funds. Not all Small Cap Value style ETFs and mutual funds are created the same. The number of holdings varies widely (from 26 to 1524). This variation creates drastically different investment implications and, therefore, ratings.
Investors seeking exposure to the Small Cap Value style should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2.
Our Robo-Analyst technology][1] empowers our unique ETF and mutual fund rating methodology, which leverages our rigorous analysis of each fund’s holdings.[2] We think advisors and investors focused on prudent investment decisions should include analysis of fund holdings in their research process for ETFs and mutual funds.
Figure 1: ETFs with the Best & Worst Ratings
* Best ETFs exclude ETFs with TNA less than $100 million for inadequate liquidity.
Sources: New Constructs, LLC and company filings
Three ETFs (SQLV, OSCV, FNK) are excluded from Figure 1 because their total net assets (TNA) are below $100 million and do not meet our liquidity minimums.
Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5
* Best mutual funds exclude funds with TNA less than $100 million for inadequate liquidity.
Sources: New Constructs, LLC and company filings
Three mutual funds (OFSIX, OVSIX, OVSYX) are excluded from Figure 2 because their TNA are below $100 million and do not meet our liquidity minimums.
WisdomTree US SmallCap Dividend Fund (DES) is the top-rated Small Cap Value ETF and Royce Small-Cap Value Fund (RVVHX) is the top-rated Small Cap Value mutual fund. RVVHX earns a Neutral rating and RVVHX earns a Very Attractive rating.
Invesco S&P SmallCap 600 Pure Value ETF (RZV) is the worst rated Small Cap Value ETF and Meridian Small Pacific Advisors Small Cap Value Fund (PASMX) is the worst rated Small Cap Value mutual fund. RZV has an Unattractive rating and PASMX has a Very Unattractive rating.
The Danger Within
Buying a fund without analyzing its holdings is like buying a stock without analyzing its business and finances. Put another way, research on fund holdings is necessary due diligence because a fund’s performance is only as good as its holdings’ performance. Don’t just take our word for it, see what Barron’s says on this matter.
PERFORMANCE OF HOLDINGs = PERFORMANCE OF FUND
Analyzing each holding within funds is no small task. Our Robo-Analyst technology enables us to perform this diligence with scale and provide the research needed to fulfill the fiduciary duty of care. More of the biggest names in the financial industry (see At BlackRock, Machines Are Rising Over Managers to Pick Stocks) are now embracing technology to leverage machines in the investment research process. Technology may be the only solution to the dual mandate for research: cut costs and fulfill the fiduciary duty of care. Investors, clients, advisors and analysts deserve the latest in technology to get the diligence required to make prudent investment decisions.
Figures 3 and 4 show the rating landscape of all Small Cap Value ETFs and mutual funds.
Figure 3: Separating the Best ETFs from the Worst Funds
Sources: New Constructs, LLC and company filings
Figure 4: Separating the Best Mutual Funds from the Worst Funds
Sources: New Constructs, LLC and company filings
This article originally published on January 28, 2019.
Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, style, or theme.
[1]Harvard Business School features the powerful impact of our research automation technology in the case New Constructs: Disrupting Fundamental Analysis with Robo-Analysts.
[2]Ernst & Young’s recent white paper “Getting ROIC Right” proves the superiority of our holdings research and analytics.
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.
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