The Truth About Stock-Picking ETFs

Managers of exchange-traded funds ("ETFs") are stock pickers... That might sound like heresy to many folks. After all, ETFs supposedly track indexes. [Chaikin PowerFeed]( The Truth About Stock-Picking ETFs By Marc Gerstein, director of research, Chaikin Analytics Managers of exchange-traded funds ("ETFs") are stock pickers... That might sound like heresy to many folks. After all, ETFs supposedly track indexes. Sure, that's what the lawyers make them say. But a lot of rules and choices determine what's in an index – and in turn, an ETF. Even the SPDR S&P 500 Trust (SPY) involves choices... The U.S. Index Committee makes choices that have resulted in a large-cap, quality-momentum collection (portfolio). It's not a small-cap, balanced portfolio. For that, you would need to invest in the iShares Russell 2000 Fund (IWM). We all make choices as investors. And we want to make the best ones. That includes deciding which ETFs are the best stock-pickers in a specific area in which we want to invest. [In the August 17 PowerFeed]( I explained why I favor the Royce Quant Small-Cap Quality Value Fund (SQLV) over the iShares Russell 2000 Value Fund (IWN). I want to go a step further today... In short, the Power Gauge can help us evaluate ETF stock-picking. And we don't have to work our way stock by stock through any ETF portfolios. In fact, this process is so easy that I've added two more ETFs to our study – the Vanguard Small-Cap Value Fund (VBR) and the iShares S&P Small-Cap 600 Value Fund (IJS). Let's get started... Recommended Links: [Oil's New Inflection Point (Prepare NOW)]( It's a new turning point for oil that could drastically alter our economy this year. Goldman Sachs says it's the crux of their next 2022 play... and numerous top hedge funds have just changed their oil positions. [Click here for the full oil story](. [Have You Heard of 'Wall Street's Blacklist?']( It's a group of companies shunned by analysts and banned from powerful hedge funds. However, this stock market phenomenon can also be the source of incredible gains. Only one man has the ability to tell the difference... which is why today, legendary investor Joel Litman is revealing how "Wall Street's Blacklist" could produce the market's next 20-bagger... beginning as soon as today's opening bell. [Get all the details right here](. First, the Power Gauge ranks all of these ETFs as "bullish" or better today. That's thumbs up for small-cap value stocks. So next, we need to find tiebreakers... For the first tiebreaker, we'll compare assets under management ("AUM"). Take a look... [Chaikin PowerFeed] Clearly, VBR is a massive ETF. IWN and IJS are big as well. And SQLV is a pipsqueak. Asset gathering is the name of the game in the ETF world. IWM, VBR, and IJS can't gather billions of dollars in assets into their ETFs unless they stick to the basics. Any nonstandard, strategic choice risks would alienate potential customers and limit AUM. SQLV's willingness to occupy an obscure niche suggests it may be open to bold choices. This insight is similar to a point I made [in the August 5 PowerFeed](. As I explained, 10-bagger stocks are more likely to be found in "obscure corners of the market." Next, let's turn to another potential tiebreaker... [We've talked about the "Power Bar" ratio]( in these pages before. In short, the Power Bar tells us how many stocks in an ETF portfolio have favorable Power Gauge ratings, "neutral" ratings, or unfavorable ratings. Let's see what it shows about these four ETFs today... [Chaikin PowerFeed] Notice that SQLV wins hands down in this tiebreaker. It's the best stock-picker. But for now, let's continue our analysis to see what these numbers pick up. We'll peek at what you could find if you looked stock by stock to see which ETF is the best stock-picker. Let's start with how each ETF defines value. Each one publishes this information in its prospectus... VBR and IJS want low tallies for standard ratios like price to earnings and price to sales. That's generic. But we can't say it's "good"... You can't divorce what you pay from what you get. VBR and IJS are like shoppers who are thrilled to pay only $1 for a gallon of milk. Hopefully, though, it won't be sour. IWN wants lower valuation ratios and "lower forecasted growth." Seriously... lower growth! That's bad. That's a ridiculous stereotype. IWN is like a shopper who insists that the $1-per-gallon bottle contain sour milk. And if the milk is fresh, he will demand a refund. Like IWN, SQLV also wants lower valuation. But it also seeks strong returns on invested capital, stability of this return, and strong debt coverage. In other words, SQLV demands low prices and good quality. It wants to buy things worth more than the price it pays. That's true value investing! Let's see how these differences play out in the four ETF portfolios... [Chaikin PowerFeed] In terms of price-to-sales ratio, IJS beats SQLV by a whisker. But when we look at what each ETF gets for its money (company characteristics)... SQLV wins big. VBR falls short. And IWN – which thinks "value" requires poor growth – is the big loser. AUM and the Power Bar pick up on what you would want to discover if you manually compared stock-picking proficiency. They're powerful supplements to the Power Gauge's ETF rankings. And as I hope you've seen today, they can be the tiebreakers you need as an investor. Good investing, Marc Gerstein Market View Major Indexes and Notable Sectors # Hld: Bullish Neutral Bearish Dow 30 +0.98% 9 17 4 S&P 500 +1.42% 155 251 91 Nasdaq +1.77% 30 51 19 Small Caps +1.55% 549 912 387 Bonds +1.39% Materials +2.27% 6 18 3 — According to the Chaikin Power Bar, Small Cap stocks and Large Cap stocks are somewhat Bullish. Major indexes are mixed. * * * * Top Movers Gainers [rating] NTAP +7.88% [rating] ON +6.50% [rating] FCX +6.10% [rating] DISH +6.06% [rating] RCL +5.20% Losers [rating] DLTR -10.22% [rating] CRM -3.39% [rating] TAP -1.68% [rating] BALL -1.32% [rating] BMY -1.27% * * * * Earnings Report Reporting Today Rating Before Open After Close AFL, COTY No earnings reporting today. Earnings Surprises [rating] ULTA Ulta Beauty, Inc. Q2 $6.30 Beat by $1.82 [rating] DELL Dell Technologies Inc. Q2 $1.84 Beat by $0.44 [rating] VMW VMware, Inc. Q2 $1.64 Beat by $0.06 [rating] WDAY Workday, Inc. Q2 $0.83 Beat by $0.03 [rating] MRVL Marvell Technology, Inc. Q2 $0.52 Beat by $0.01 * * * * Sector Tracker Sector movement over the last 5 days Energy +5.46% Materials -0.01% Staples -1.06% Utilities -1.09% Industrials -1.18% Health Care -1.22% Real Estate -2.26% Financial -2.52% Communication -2.83% Discretionary -2.96% Information Technology -3.14% * * * * Industry Focus Innovative Technology Services 19 42 35 Over the past 6 months, the Innovative Technology subsector (XITK) has underperformed the S&P 500 by -20.58%. Its Power Bar ratio, which measures future potential, is Weak, with more Bearish than Bullish stocks. It is currently ranked #19 of 21 subsectors and has moved down 1 slot over the past week. Indicative Stocks [rating] RBLX Roblox Corporation [rating] SNAP Snap Inc. [rating] SHOP Shopify Inc. * * * * You have received this e-mail as part of your subscription to PowerFeed. If you no longer want to receive e-mails from PowerFeed, [click here](. You’re receiving this e-mail at {EMAIL}. 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