Best And Worst Q3 2020: Small Cap Growth ETFs And Mutual Funds

Best And Worst Q3 2020: Small Cap Growth ETFs And Mutual Funds

The Small Cap Growth style ranks last out of the twelve fund styles as detailed in our Q3’20 Style Ratings for ETFs and Mutual Funds report. Last quarter, the Small Cap Growth style ranked last as well. It gets our Very Unattractive rating, which is based on an aggregation of ratings of 19 ETFs and 544 mutual funds in the Small Cap Growth style. See a recap of our Q2’20 Style Ratings here.

Figures 1 and 2 show the five best- and worst-rated ETFs and mutual funds in the style. Not all Small Cap Growth style ETFs and mutual funds are created the same. The number of holdings varies widely (from 28 to 3213). This variation creates drastically different investment implications and, therefore, ratings.

Investors should not buy any Small Cap Growth ETFs or mutual funds because none get an Attractive-or-better rating. If you must have exposure to this style, 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 and Worst Ratings – Top 5

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

(Sources: New Constructs, LLC and company filings)

The Janus Henderson Small Cap Growth Alpha ETF (JSML) is excluded from Figure 1 because its total net assets (TNA) are below $100 million and do not meet our liquidity minimums.

Figure 2: Mutual Funds with the Best and Worst Ratings – Top 5

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

(Sources: New Constructs, LLC and company filings)

The Vanguard S&P Mid-Cap 400 Growth ETF (IVOG) is the top-rated Small Cap Growth ETF and the Virtus KAR Small-Cap Value Fund (VQSRX) is the top-rated Small Cap Growth mutual fund. Both earn a Neutral rating.

The RBB MFAM Small-Cap Growth ETF (MFMS) is the worst-rated Small Cap Growth ETF and the Dunham Small Cap Growth Fund (DADGX) is the worst-rated Small Cap Growth mutual fund. Both earn 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.

Performance of Holdings = Performance of Fund

Analyzing each holding within funds is no small task. We perform this diligence with scale. 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 Growth 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 July 24, 2020.

Disclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, style, or theme.

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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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