Market Overview

Stinkers: S&P Not Too Found Of 3 Large ETFs

Just because an ETF has surpassed a lofty assets under management (AUM) total, say $500 million, doesn't mean it's worth owning and Standard & Poor's Capital IQ highlights three such ETFs in a recent research note.

And at least two of those funds, the SPDR S&P Oil & Gas Exploration & Production ETF (NYSE: XOP) and the First Trust Dow Jones Internet Index (NYSE: FDN), are well known to many investors. Both ETFs, along with the Rydex S&P Midcap 400 Pure Growth ETF (NYSE: RFG), are rated underweight by S&P Capital IQ based on their underlying fundamentals.

That may come as a surprise to some when considering FDN, which has over $522 million in AUM, devotes almost 18% of its weight to Google (Nasdaq: GOOG) and Amazon (Nasdaq: AMZN).

News that XOP, the largest of the trio discussed in the note with over $724 million in AUM, garners an underweight rating may surprise energy investors. The ETF, which is home to almost 75 stocks, doesn't allocate more than 1.59% of its weight to any one stock and some of the biggest integrated, independent and refining names call this ETF home.

Of RFG, which has almost $513 million in AUM, S&P says the following: "The Overall Underweight ranking is driven by relatively weak inputs within our Performance Analytics and Risk Considerations assessments of the ETF. A number of the ETF's largest holdings are considered overvalued based on S&P Fair Value, our quantitative valuation tool, and have below-average S&P Quality Rankings, including Hansen Natural (Nasdaq: HANS) and TIBCO Software (Nasdaq: TIBX).

"These three ETFs are among the lower-ranked securities in our coverage universe, standing out unfavorably due in part to the valuation and risk characteristics of their underlying holdings, according to S&P Capital IQ. While they are providing investors exposure to certain narrow aspects of the equity markets in a transparent, diversified vehicle, we think that learning what's inside can help sort through potential alternatives," S&P analyst Todd Rosenbluth said in the note.

Overall, the performance of RFG isn't terrible as the ETF is only slightly negative year-to-date. XOP is down 5% while FDN is down about 8%.

S&P was critical of FDN's 0.6% expense ratio and said XOP's "underlying holdings are considered on average to be overvalued based of S&P Fair Value as well as having both below-average S&P Quality Rankings and relatively weak, non-investment-grade S&P Credit Ratings."

Posted-In: Analyst Color Long Ideas News Sector ETFs Broad U.S. Equity ETFs Short Ideas Specialty ETFs Pre-Market Outlook

 

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