Are Analyst Recommendation ETFs Worth the Cost?
More often than not, analyst recommendations help investors make investment decisions in order to realize their long-term objectives. The analyst can present before investors a comprehensive research report containing valuable information about the company and the industry, competition and business models, financial performance, dividend payouts and many others (see 11 Great Dividend ETFs).
Analysts put in a lot of time and effort trying to decipher the minutest of intricacies present in the business models of companies. Their research reports assign ratings like buy, sell and hold, to individual company stocks. Based on the ratings, recommendation and rationale, investors often decide their future plan of action (read Play A Consumer Recovery With These Discretionary ETFs).
However, it is prudent to note that the ratings and recommendations should not be viewed as ‘universal truths’, by all classes of investors. For example, a highly risky short-term investment with a good rating by an analyst might be a good option for a 30-year-old employee, but not for a 65-year-old retired person.
Investors should also note that while a great deal of work is often put into the recommendations, unfavorable market conditions—and a focus on central banks instead of stock specific events—can make otherwise solid predictions relatively useless. This has especially been the case for markets over the past few months as stocks have fallen across the board and European events have dominated the headlines.
Still, assuming that markets eventually start trading on fundamentals again, analyst recommendations could be a key item that many investors should still look at when researching a particular opportunity (read Real Estate ETFs: Unexpected Safe Haven).
For investors looking to take these recommendations in a basket approach, there are a few ETFs that utilize their advice in order to construct portfolios. Below, we highlight two ETFs that use these principles for their investment theses and discuss whether investors should consider these products or go with cheaper, broad index based funds instead:
PowerShares Morningstar StockInvestor Core ETF (PYH)
Launched in December of 2006, PYH seeks to match the performance and yield of the Morningstar StockInvestor Core Index before fees and expenses by investing at least 90% of its total assets in stocks from the index.
The index portfolio is rebalanced monthly and is comprised of 50 stocks that are considered to be of high quality, based on certain parameters as laid down by Morningstar. So while it isn’t a ‘pure’ analyst recommendation fund, the product arguably takes into account analyst recommendations in order to come up with its portfolio.
Having existed for almost six years with an average daily volume of 2,174 shares, and total assets of $14.94 million, questions about its liquidity and popularity have arisen (see Ten Biggest U.S. Equity Market ETFs).
In terms of sectors, PYH lays maximum emphasis on the Information Technology and Financial sectors which have been the two best performing sectors this year. It has only 46 securities in its portfolio but it does well in allocating 38.03% of its assets in the top 10 holdings.
However, active management decisions have led to 50 basis points charged in fees and expenses to investors. Just like any other broad market ETF, this product also faced a tough time during the broader market slump last year (read Utility ETFs: Slumping Sector In Rebounding Market).
The active management and continuous rebalancing of the fund (which is the main reason for such a steep expense structure) also could not always help the fund sail through the slump. The lack of liquidity and a comparatively higher expense ratio also adds to investor worries.
However, the ETF has also seen an uptrend since the start of 2012. The product has added about 4.7% since the start of the year while it also pays out a decent yield of about 1.6%.
Guggenheim Raymond James SB-1 Equity ETF (RYJ)
RYJ is another relatively expensive product that targets the broader markets. It charges investors 0.75% in fees and expenses. The equity ETF tracks the Raymond James SB-1 Equity Index (SB refers to Strong Buy).
The index holds securities that have been ranked under ‘Strong Buy 1’ by the financial services conglomerate Raymond James and Associates. The high expense ratio can be attributed to this unique investment methodology adopted by the ETF.
The product debuted in May of 2006. Since then it has managed $82.41 million dollars in its asset base. The fund is well diversified as it holds less that 1% of its total assets in every security it holds (read Create a Diversified Portfolio Using ETFs). Presently the holdings consist of 191 securities. However, the average daily volume is somewhat low, coming in at 32,529 shares.
Despite including all highly rated securities, the fund could not prevent facing a bearish trend last year pushing the fund lower by 2.1% in the last one year period. However, since the start of 2012, the product has witnessed an uptrend and has fetched investors roughly 8%.
This was an overview of some expensive products from the multi cap-blend space which targets the broader markets. The table below shows a tabular comparison between these two funds and other low cost choices for investors that target the segment. As you can see, while the analyst recommendation-focused ETFs may have some strengths, most haven’t been able to beat out their index focused counterparts, suggesting that some investors would be better served by looking at expenses rather than analyst recommendations:
ETF | Inception | 1 Year Return (%) | Yield (%) | % in top 10 | Expense ratio | # of holdings | ADV | Total Assets |
December 2006 | 0.70 | 1.56 | 38.03 | 0.50% | 46 | 2,174 | $14.94 million | |
May 2006 | -2.10 | 0.12 | 6.98 | 0.75% | 191 | 32,529 | $82.41 million | |
November 2009 | 1.70 | 1.73 | 16.77 | 0.06% | 1734 | 309,307 | $1.03 billion | |
May 2000 | 1.50 | 1.67 | 16.75 | 0.20% | 2940 | 325,864 | $3.32 billion |
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Read the analyst report on PYH
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Read the analyst report on SCHB
Read the analyst report on IWV
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Read the analyst report on PYH, RYJ, SCHB, IWV
