Funds that stick to a specific style make good core holdings — they establish your asset allocation and help build diversified portfolios, explains Richard Moroney, editor of Dow Theory Forecasts.
But, with most funds, what you see is not necessarily what you get. Just because a fund may mention a style in its name or hail from a particular style box does not mean it is firmly rooted in a certain category.
Consider exchange-traded funds (ETFs) that focus on large-cap U.S. stocks. The average portfolio is 77% invested in large stocks, with the rest in midcaps (21%) and small-company stocks (2%). The typical mid-cap ETF has only 58% of assets in midsized companies, while small-cap funds are 79% invested in their namesake.
Compounding matters, true growth and value funds are hard to find. The average growth ETF is only 59% invested in the fastest-growing companies, which are often measured using earnings growth rates.
Value stocks make up about 14% of growth ETF portfolios, with the balance in “blend” stocks that display both traits. For the record, value funds are only 56% invested in bona fide value stocks.
To be sure, there is no universally accepted way to segment stocks by size or growth and value characteristics. For this story, we relied on Morningstar definitions. Still, it makes sense to look under a fund’s hood at its core holdings.
iShares Morningstar Large-Cap Value ETF (JKF) stands tall among large-cap value funds. It holds 70 stocks, with financials representing 28% of the portfolio, followed by consumer staples at 17%.
Roughly 73% of the portfolio is invested in bona fide value stocks, and the average market capitalization is $94 billion. Sporting a modest 0.25% expense ratio, the ETF ranks among the top 27% of its peer group on five-year performance.
