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To create the 2016 Money 50 list of the best mutual funds and ETFs, Money editors look for solid long-term performers with these important traits:
Low fees. Below average expense ratios are a good predictor of better-than-average performance. Expenses averaged 0.9% for actively managed Money 50 stock funds, compared to 1.3% for stock funds in general.
Long tenure. Good returns don't mean much if the manager responsible for them is no longer around. The average tenure for a Money 50 manager is 11.5 years, compared to 5.9 years for funds in general.
Changes to the List
Since the Money 50 list is built to last, you can expect few changes from year to year. But this time around we made one significant change: We added three tilted index ETFs, better known as smart-beta funds, which enable you to lean more heavily toward particular investing styles at a lower cost than hiring an active manager. To make room, we dropped three lagging actively managed funds.
In: Many investors are using smart-beta funds as a cheaper alternative to traditional actively managed funds, which typically underperform their benchmarks. The three funds we're adding to the Money 50 charge no more than 0.38%.
- PowerShares S&P 500 High Quality (SPHQ). It's hard to find an ETF that is pickier than this one, which buys only shares of companies with balance sheets strong enough to be rated A– or better by S&P. Case in point: The fund holds 132 of the largest U.S. companies but not a single share of Apple, which carries a B+ rating. Overall, its technology stake is just 6%, vs. 21% for the S&P 500, while it holds a hefty 27% in industrial companies. With its focus on consistent dividend payers, the ETF has been less risky than its large-cap peers. Over the past five years, its returns beat 96% of its rivals.
- WisdomTree MidCap Dividend (DON). Most dividend-paying stock funds hold shares of companies paying a yield higher than the S&P 500. The WisdomTree approach is to build indexes based on the dollar amount per share the companies pay out in dividends. The portfolio leans toward bargain-priced, midsize stocks—its holdings carry an average market capitalization of $6 billion. DON ranked in the top 25% of its category in three of the past five years, and it recently paid a yield of 2.4%.
- WisdomTree SmallCap Dividend (DES). This ETF holds dividend-paying companies, but with a focus on smaller firms. So it's riskier than its midcap sibling. But the ETF has held up relatively well in down years, while its five-year returns rank in the top 40% of its category.
Out: The following funds have lagged their peers badly over the past three, five, and 10 years. All three are bargain-hunting, or value funds, which is an investing style that has been out of favor. The managers have outperformed in the past, but our smart-beta funds are a better bet for future returns. We're not suggesting that you sell now if you own them. But it's time to start considering other options.
- Delafield (DEFIX)
- Weitz Hickory (WEHIX)
- Berwyn (BERWX)
Funds Under Review
The Money 50 is all about the long term. So we do give poor performers time to improve. But persistent laggards are placed on our watch list, as are those with manager changes. Two funds merit closer scrutiny, but there's no need to make any moves now:
- Wasatch Small Cap Growth (WAAEX): Jeff Cardon, who's been at the helm since 1986, is stepping down as lead manager. Co-manager J.B. Taylor has been around for three years, but we are waiting to see how the transition goes.
- Royce Opportunity (RYPNX): Royce has delivered lousy returns over the past two years. It also charges a relatively high fee of 1.15%.