Data-Driven Ranking of Mutual Funds and ETFs

With the start of a new year, many of us evaluate our financial situation, focusing on preparing for taxes and reviewing our various financial statements to understand the status of our investments. With a significant decline across the three major stock market indices (Dow Jones, S&P 500, and NASDAQ) in 2022, it's important to utilize a data driven approach to help support future decisions.

Not being a financial advisor or an expert, but rather a data driven engineer, I explored some basic investment questions using historical data. Realizing past performance is not indicative of future results, additional information may aid in future decisions.

Basic Questions Focusing on Equities

• How has the market performed in the past?
• What investment categories are best for long-term investment?
• Which mutual funds or ETFs are the best in each category?
• In general, are ETFs or mutual funds better?
• What Fund Families have the best track record?

How has the market performed in the past?

Figure 1 shows the annualized returns for the three market indices as well as the average 1 Year Treasury Bond interest rate and the inflation rate across the last 50+ years. The 2008 market crash, caused by the subprime mortgage crisis, left the decade from 2000 to 2010 with an overall negative return. The NASDAQ was hit the hardest with an annualized return of -5.8%. Likewise, the 1970s had poor returns due to the high inflation and interest rates. Nonetheless, other decades had substantial returns, underscoring the importance of investing with a long-term horizon and avoiding the temptation to jump in and out of the market. This long-term investment strategy is seen in the 30-year averaged annual return of 8.1% across the three indices.

Figure 2 shows a normalized plot of the three stock indices, illustrating the recovery of the market after the large declines experienced in 2008. To enable a better comparison of the recovery of each index, the values were normalized by dividing them by their respective maximum values prior to the 2008 decline.

Figure 3 illustrates how the Dow Jones, NASDAQ and S&P 500 declined over 50% during this downturn. Interestingly, the NASDAQ was able to return to its previous high in just 2.1 years, while the Dow Jones and S&P 500 took approximately 4 years.

There will always be downturns in the market. As seen in 2008, the market will recover over time, demonstrating the importance of patience for successful long-term investing.

What investment categories are best for long-term investment?

In searching the literature on mutual funds and ETFs, most articles tend to focus on providing a list of the largest funds or those with the best returns over a particular period of time. Others may focus on expenses, but the challenge is often how to combine these factors and others to sort through the vast number of funds to find those that align with your particular investment requirements.

To address this challenge, I developed a matrix a few years ago that utilizes 11 parameters to score and rank funds. This approach provides a more comprehensive and data-driven way to evaluate funds based on an individual's investment goals and preferences. This decision matrix was previously described in my earlier paper, Selecting Mutual Funds & ETFs Using a Decision Matrix .

Figure 4 provides a summary of the 11 ranking parameters used in this decision matrix, as well as their weighting or importance when scoring the matrix for either a taxable account or a tax-deferred account, such as an IRA.

These parameters are carefully chosen to represent a range of factors that are important for evaluating mutual funds and ETFs, including historical performance, expense ratios, risk or preservation, and consistency of performance. By weighting these factors appropriately based on the investor's account type and individual investment goals, the decision matrix can provide a more customized and relevant approach to fund insight.

Approximately 4,000 mutual funds and ETFs across 550 fund families (e.g., Vanguard, Fidelity, etc.) were evaluated using the decision matrix. After ranking the funds, the funds were then broken down into groups based on their investment targets, and capitalization and investment strategy. For instance, funds were grouped according to investment targets such as healthcare or technology, as well as capitalization and investment style, such as large-cap growth or small-cap value. This grouping helped identify funds aligned with specific investment objectives. The PDF document titled "Fund Categorizations " offers more in-depth information regarding these categories.

Figure 5 provides a visual representation of the relative relationships between the 14 categories of funds reviewed in terms of their 10-year annualized return and variability in returns over the same period. The analysis is based on the top 10 funds within each category, as determined by the decision matrix.

The data analyzed using the decision matrix shows that technology funds have the highest variability but also the highest return over a 10-year period, compared to other categories. On the other hand, utilities funds have the lowest variability but also a lower return over the same period.

Figure 6 provides a graphical representation of the actual 10-year annualized return for each of the 14 categories of funds, based on the top 10 funds within each category as determined by the decision matrix.

The top 10 funds in the Technology sector funds have an annual 20.0% return over the last 10 years followed by Large Cap Growth funds (14.3%) that are mostly comprised of technology stocks. Precious Metal Funds had the worst return of -1.2%.

Figure 7 shows how the Technology funds delivered strong returns but were subject to large swings based on economic conditions.

The Technology category's top 10 ranked ETFs and mutual funds are summarized in Figure 8.

In addition to the 11 matrix scoring criteria provided in Figure 8, independent ratings from Zacks Investment Research are also included for each fund. The Zacks rating system uses a scale of 1 to 5, with a rating of 1 indicating a "Strong Buy" recommendation and a rating of 5 indicating a "Strong Sell" recommendation. A rating of 2 corresponds to a "Buy" recommendation, 3 corresponds to a "Hold" recommendation, and 4 corresponds to a "Sell" recommendation. The inclusion of Zacks ratings provides additional information to consider when evaluating each fund.

Which mutual funds or ETFs are the best in each category?

To gain insight into the top investment options within the 14 evaluated categories of investment, please refer to Attachment 1 at the end of this article.

In general, are ETFs or mutual funds better?

There is an ongoing debate about whether investors should choose mutual funds or ETFs for their investment portfolios. ETFs typically have a tax advantage because the stocks within the ETF are bought and sold less frequently compared to managed funds. On the other hand, managed funds are perceived to be better at correcting based on market conditions. To help answer this question, Figure 9 was developed by examining the composition of funds within each investment category.

Across all 14 investment categories, ETFs comprised approximately 63.6% of the top 10 funds. Notably, the Large Cap Blended category was made up entirely of ETFs, while Small Cap Growth had only 10% ETFs in the top 10 funds. These results highlight the importance of ETFs in the top-performing funds across different investment categories, although with varying degrees of preference. Therefore, the choice between mutual funds and ETFs ultimately depends on the overall investment strategy.

What Fund Families have the best track record?

Choosing a fund family can be influenced by various factors such as trading convenience, online tools and access, research provided, historical track record, etc. To identify potentially superior fund families, the number of times each family appeared in the top 10 fund list across the 14 investment categories was determined, as shown in Figure 10.

In terms of frequency of appearance in the top 10 list, Invesco was the dominant fund family, appearing 26 times (18.6%), followed by Vanguard with 12 (8.6%), and iShares with 11 appearances or 7.9%

Conclusion

Selecting the right mutual fund or ETF can be a daunting task, especially with the overwhelming number of choices available in the market. However, by using a decision matrix to evaluate the top-performing funds in various investment categories, investors can make more informed decisions based on their investment objectives and risk tolerance. This analysis shows that ETFs are a significant part of the top-performing funds in many investment categories, and some categories have a greater preference for ETFs than others. Additionally, choosing a reputable fund family can also play a crucial role in achieving investment goals. Invesco emerged as the dominant fund family in the analysis, appearing 26 times in the top 10 list across various investment categories, followed by Vanguard and iShares. Ultimately, the key is to perform due diligence and select funds that align with your investment objectives, risk tolerance, and investment horizon, while keeping an eye on expenses and other factors that impact performance.

Attachment 1

This attachment provides a comprehensive breakdown of the 14 distinct investment categories analyzed in this article, along with links to the decision matrices used to rank the funds/ETFs in each category.

Figure 11 summarizes the top 10 funds/ETFs in each investment category, sorted by their annualized 10-year return. The Technology category had the highest ranking due to its top 10 funds/ETFs having the highest annualized 10-year return.

1. Technology

Link to Decision Matrix: Technology Funds.xlsm

Link to PDF Version of Matrix: Technology Funds.pdf

Note: Macros are disabled when downloading the spreadsheet. See the following to enable the macros to use the full functionality. Enabling Macros.pdf

2. Large Cap Growth

Link to Decision Matrix: Large?Cap Growth Funds.xlsm

Link to PDF Version of Matrix: Large?Cap Growth Funds.pdf

3. Health

Link to Decision Matrix: Health Funds.xlsm

Link to PDF Version of Matrix: Health Funds.pdf

4. Mid Cap Growth

Link to Decision Matrix: Mid Cap Growth.xlsm

Link to PDF Version of Matrix: Mid Cap Growth.pdf

5. Small Cap Growth

Link to Decision Matrix: Small Cap Growth.xlsm

Link to PDF Version of Matrix: Small Cap Growth.pdf

6. Finance

Link to Decision Matrix: Finance Funds.xlsm

Link to PDF Version of Matrix: Finance Funds.pdf

7. Large Cap Blended

Link to Decision Matrix: Large Cap Blended Funds.xlsm

Link to PDF Version of Matrix: Large Cap Blended Funds.pdf

8. Large Cap Value

Link to Decision Matrix: Large Cap Value Fund s.xlsm

Link to PDF Version of Matrix: Large Cap Value Funds.pdf

9. Small Cap Value

Link to Decision Matrix: Small Cap Value Fund s.xlsm

Link to PDF Version of Matrix: Small Cap Value Funds.pdf

10. Mid Cap Value

Link to Decision Matrix: Mid Cap Value Funds .xlsm

Link to PDF Version of Matrix: Mid Cap Value Funds.pdf

11. Small Cap Blended

Link to Decision Matrix: Small Cap Blended Funds .xlsm

Link to PDF Version of Matrix: Small Cap Blended Funds.pdf

12. Mid Cap Blended

Link to Decision Matrix: Mid Cap Blended Funds .xlsm

Link to PDF Version of Matrix: Mid Cap Blended Funds.pdf

13. Utilities

Link to Decision Matrix: Utility Funds .xlsm

Link to PDF Version of Matrix: Utility Funds.pdf

14. Precious Metals

Link to Decision Matrix: Precious Metals Funds.xlsm

Link to PDF Version of Matrix: Precious Metals Funds.pdf

Note: Microsoft Office has a default security setting that disables macros when you download Excel files from external sources. If you wish to use the full functionality of the spreadsheets provided with this article, you will need to enable macros by following these steps: