Why You Need To Replace That S&P 500 Equity Fund

seekingalpha07-25

The S&P 500 has had a great run but is now overvalued. Now might be a good time to consider alternative equity funds.We can gain insight into a fund’s future return by comparing its return drivers – ...

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Now might be a good time to consider alternative equity funds.We can gain insight into a fund’s future return by comparing its return drivers – ...</p>\n\n<a href=\"https://seekingalpha.com/article/4706197-why-you-need-to-replace-that-s-and-p-500-equity-fund\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>Why You Need To Replace That S&P 500 Equity Fund</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nWhy You Need To Replace That S&P 500 Equity Fund\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-07-25 01:21 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4706197-why-you-need-to-replace-that-s-and-p-500-equity-fund><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>The S&P 500 has had a great run but is now overvalued. Now might be a good time to consider alternative equity funds.We can gain insight into a fund’s future return by comparing its return drivers – ...</p>\n\n<a href=\"https://seekingalpha.com/article/4706197-why-you-need-to-replace-that-s-and-p-500-equity-fund\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"OEX","symbol_name":"标普100","start_time":0,"source_url":"https://seekingalpha.com/article/4706197-why-you-need-to-replace-that-s-and-p-500-equity-fund","article_id":"2454835505","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1936201908/image_1936201908.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2454835505","pubTimestamp":1721841711,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"A good approach would be to compare the fund's current price multiple  to a fair value price multiple given the estimated earnings growth and dividend yields of the stocks that the fund has invested in. One can also estimate the fund's future return using its earnings growth and dividend yield. The future performance estimate can be further enhanced by estimating a justified price multiple - justified from the standpoint of what the market had typically paid over the long term for a given earnings growth rate and dividend yield. This article examines fifty-four equity funds' earnings growth rate, dividend yield, current, fair, and justified price-earnings ratio then estimates and compares fund future returns. A list of the best current funds to buy is presented. Fund Analysis Approach Price-Earnings Ratio and PEG The SPDR S&P 500 ETF  is a good proxy for the S&P 500. Morningstar gives it a 4  star rating. The closing price on July 19 was $548.99. 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Now might be a good time to consider alternative equity funds.We can gain insight into a fund’s future return by comparing its return drivers – earnings growth and dividend yield – to its current valuation, as well as the risks of buying the fund today.This article compares the earnings, dividend yield, current valuation, safety margin, and estimated future return of fifty-four equity funds and presents the best equity funds to buy today.Mid-Cap Value and Energy funds have the best valuation and estimated future returns. Background The 20-year price performance of the S&P 500 (SPY) is shown below. The index has returned over a 150% gain since bottoming out in March 2020. The index, however, has become increasingly overvalued. The index has had an average price multiple - P/E - of 19.03 over the last 20 years. The price of the index if it was at its 20-year 19.03 price multiple is shown in blue. Black shows the actual price history of the index. Even after last week's 2% drop, the index's 23.6 trailing price-earnings ratio is 24% above its longer-term average. As shown on the chart, the index's price has oscillated above and below its long-term average. The key risk going forward with an S&P 500 fund is its overvaluation and consequential potential to eventually return to its lower mean valuation. Now might be a good time to consider investing in equity funds which are not as overvalued as an S&P 500 index fund. S&P 500 History (FAST Graphs) In choosing an equity fund, an investor should consider not only return potential but also the fund's risk. An investor wants both high returns and minimal risk. He or she might accept a higher risk if it leads to higher performance. But how does one assess risk versus performance? A good approach would be to compare the fund's current price multiple (Price-to-Earnings ratio) to a fair value price multiple given the estimated earnings growth and dividend yields of the stocks that the fund has invested in. One can also estimate the fund's future return using its earnings growth and dividend yield. The future performance estimate can be further enhanced by estimating a justified price multiple - justified from the standpoint of what the market had typically paid over the long term for a given earnings growth rate and dividend yield. This article examines fifty-four equity funds' earnings growth rate, dividend yield, current, fair, and justified price-earnings ratio then estimates and compares fund future returns. A list of the best current funds to buy is presented. Fund Analysis Approach Price-Earnings Ratio and PEG The SPDR S&P 500 ETF (SPY) is a good proxy for the S&P 500. Morningstar gives it a 4 (out of 5) star rating. The closing price on July 19 was $548.99. Morningstar's estimate of SPY's portfolio makeup on July 18, 2024, is shown below. Morningstar assesses that SPY is a Large Cap Growth LCG fund. The weighted average forward price-earnings ratio of the stocks in the portfolio is 22.01. The weighted average future long-term earnings growth rate of the stocks in the portfolio is estimated to be 12.31%. The average portfolio dividend yield is 1.46%. The actual 12-month trailing dividend yield distribution to owners of SPY was 1.26%. S&P 500 Portfolio Measures (Morningstar) Morningstar's data was only one day old. Not all funds examined had data that recent. I corrected all the funds P/E to the same date - Close of business last week, July 19. The calculation was: Current P/E = P/E on data date * current price/price on data date. For SPY: Current P/E on July 19 = P/E on July 18 * Price July 19/Price July 18. P/E July 19 = 22.01 * $548.99/$552.66 = 21.86. A simple estimate of the future return of an equity fund is its combined earnings growth rate + dividend yield. If the P/E ratio of the S&P 500 did not change but remained at its current price multiple, its rate of return would be its earnings growth rate plus dividend yield. That would give a (12.31 + 1.26) = 13.57% annual rate of return. Peter Lynch's favorite metric to evaluate stock valuation is the stock's PEG ratio - P/E divided by earnings growth rate + dividend yield. One can use that to assess the portfolio's valuation. For the S&P 500 (SPY): PEG = Forward P/E / (Earnings Growth Rate + Dividend Yield). PEG = 21.86 / (12.31 + 1.26) = 1.62. Higher than what Peter Lynch deemed optimum - under 1.0. This gives an indication that the S&P 500 is currently overvalued. Fair Value P/E and Margin of Safety Another approach to stock and/or fund valuation is to compare its current P/E to a Fair Value P/E - a P/E that is a fair value to purchase given the stock/fund earnings growth rate and dividend yield. Buying a stock or fund with a P/E below its Fair Value P/E would give a margin of safety. Buying a stock or fund above its Fair Value P/E increases risk, and the higher above its fair value, the riskier the investment becomes. An excellent approach to calculating a Fair Value P/E is given in Vitalily N. Katsenelson's book Active Value Investing. Katsenelson gives the Fair Value P/E as: Fair Value P/E = A + B*EG + DY. Where A is the base P/E of an investment with zero earnings growth. Katsenelson uses a value of 8 with a note, \"you may choose another number. Benjamin Graham in his book The Intelligent Investor suggested a P/E of 8.5 for a zero-growth company.\" EG is the earnings growth rate. B is the earnings growth rate multiple, which is 0.65 in Katsenelson's book up to an earnings growth rate (EG) of 16% at which point it changes to 0.5 for earnings above 16%. DY is the dividend yield of the investment. The table below from the book Active Value Investing illustrates how to compute the Fair Value P/E. Computing Fair Value PE (Katsenelson) Using the formula Fair Value P/E = 8 + 0.65 EG + DY, the current Fair Value P/E of the S&P 500 is 8 + 0.65*12.31 + 1.26 = 17.26. Note that the Active Value Investing formula above gives a trailing Fair Value P/E = Fair Value Price / trailing earnings. To compare it to the forward P/E listed in the Morningstar portfolio data, it must be converted to an equivalent forward P/E which equals Fair Value Price / (2024-year earnings). The calculation to convert the trailing Fair Value P/E to Forward P/E is straightforward. Fair Value forward P/E = Fair Value trailing P/E * trailing earnings / (2024 Year End earnings). 2024 Year End earnings ~ current trailing 12-Month earnings * (1 + EG*% Year Remaining). That gives: Fair Value forward P/E = Fair Value trailing P/E / (1 + EG*days left in year/365). Fair Value forward P/E = 17.26 / (1+12.31%* 165 / 365) = 16.35. The Fair Value P/E should be viewed as the P/E wherein the investment is a good investment most likely to give the investor above-average returns. This can be seen on the FAST Graphs chart below. If one bought the S&P 500 (SPY) in December 2018 when it was at a price multiple just below its Fair Value P/E, and it was held to today, it would have given an annual return of 17.2% about twice its 20-year average return of 8.8%. S&P 500 return when purchased at a Fair Value PE (FAST Graphs) Katsenelson gives the Buy P/E = Fair Value P/E / (1+ Margin of Safety) One can manipulate that equation to produce: Current Margin of Safety = Fair Value P/E / Current P/E -1. That would give the current Margin of Safety of the S&P 500 = 16.35 / 21.86 -1 = -25.2%. The Fair Value P/E is a P/E which is a good price multiple to buy, and the Margin of Safety tells you how far above or below the current price multiple is compared to a good price multiple to buy the fund. Buying funds below its Fair Value P/E puts investors on a path to outperform. It is interesting to compare the three stock indices usually used to assess stock market performance - The S&P 500 (SPY), SPDR® Dow Jones Industrial Average ETF Trust (DIA), and the Invesco QQQ Trust ETF (QQQ). Then compare those indices to a portfolio composed of today's stock market darlings, the Magnificent Seven (MAGS). A comparison of funds composed of those four portfolios is shown below from the least overvalued - the Dow Industrials to the most overvalued - The Magnificent Seven. Safety Margin Comparison of Major Stock Indices (Morningstar, Author) The Roundhill Magnificent Seven has the highest combined earnings growth rate plus dividend yield of all four funds. It could give good near-term returns. That said, investing in it today is very risky given its high PEG ratio and negative 50% margin of safety. Its current P/E is almost twice its fair value P/E. You currently would pay twice the amount for a dollar of earnings compared to buying the Dow Industrial Average, with the potential of heavy losses if the stocks in the portfolio revert to their fair value valuation. Justified P/E and Estimated Future Return I extended the concept of Fair Value P/E to estimate fund future returns. Instead of computing a Fair Value P/E, a good price multiple to buy a fund, I derived a Justified P/E, which is the P/E that the market has paid for a given amount of earnings growth and dividends over the last 20 years. So, a market average P/E if you will rather than the best P/E to buy. The same concept applies: Justified P/E = A + B*Earnings Growth Rate + Dividend Yield. I used an A of 9 which is slightly higher than what Benjamin Graham suggested (8.5) for a no growth company. I anchored B to the 20-year history of the S&P 500. As shown above, in the first FASTGraph S&P 500 20-year performance history chart, the 20-year averages of the S&P 500 were: Earnings Growth Rate = 8.1%. Normal P/E Ratio = 19. The average dividend yield of the S&P 500 over the last 20 years was 1.9% S&P 500 Dividend Yield History. Justified P/E is an estimate of the average price multiple that the market has paid for a stock, or a fund, given its earnings growth and average dividend yield. Anchored to the S&P 500's 20-year History. Justified P/E = 19 = 9 + B*8.1+1.9. Solving the math gives B = 1.0. So, for large-cap stocks which the S&P 500 is representative of, Justified P/E = 9 + EG + DY. Small Caps have had, on average, a lower price multiple than large-cap stocks. Investors were willing to pay more, on average, for large-cap stocks than small-caps. This reflects that large caps tend to be safer in economic downturns, have better access to capital, and have lower volatility. The chart below shows the Price to Earnings discount - about 2 - that the small-cap has had recently. Historic Large and Small Cap Valuation (Morningstar) I used an A of 9 for large-cap, 7 for small-cap, and an in-between value of 8 for mid-cap funds. Using the derived formula for the S&P 500 with its current earnings growth rate and dividend yield: Justified P/E = A + EG + DY. Justified P/E = 9 + 12.31 + 1.26 = 22.57. The S&P 500's Justified P/E is higher than its 20-year average of 19 because its estimated future long-term earnings growth rate (12.31) is higher than its 20-year average earnings growth rate (8.06). One can now estimate future returns assuming the currently overvalued S&P 500 reverts to its more normal 20-year average Justified P/E in the next 2 ½ years (by the end of 2026). The calculation is as follows. Current Price (SPY) = $548.99. Current Forward P/E = 21.86. 2024 Year End Earnings = Price / FWD P/E = $548.99/21.86 = $25.11. 2026 Earnings = 2024 Earnings * (1+EG) ^2 = 25.11*(1.1231) ^2 = $31.67. 2026 Price = 2026 Earnings * Justified P/E = $31.67 * 22.57= $714.84. Annual Return = (2026 price/current price) ^ (1/# Years) + DY -1. From now to the end of 2026 is 2.45 years. Annual Return = (714.84/$548.88) ^ (1/2.45) + 1.26% -1. Annual Return = 11.9% + 1.26% = 12.6%. Where 11.9% is the price return and 1.26% is the dividend yield. If the price multiple did not change, the S&P 500's return would be its earnings growth rate + dividend yield = 12.31% + 1.26% = 13.57%. The currently overvalued S&P 500's future annual return should be somewhere between its return with no change in P/E and its return if it reverts to a normal 20-year average P/E for its given earnings growth rate and dividend yield. I averaged the returns calculated by the two approaches to produce an average estimated rate of return = (12.6% + 13.57%) = 13.1%. Comparing the estimated returns of the three stock indices plus the Magnificent Seven (MAGS) is shown below. Estimated Returns Comparison of Major Stock Indices (Morningstar, Author) The SPDR® Dow Jones Industrial Average ETF Trust (DIA) has the highest estimated return. The DOW's estimated earnings growth rate plus dividend yield is only 9% lower than the S&P 500's, but its current P/E is 19% lower than the S&P 500. The Invesco QQQ Trust ETF's (QQQ) earnings plus dividend yield is 31% higher than the Dow's, but its current P/E is 57% higher. Both it and Magnificent Seven have large negative safety margins plus low justified returns as they are very overvalued with P/Es above their long-term averages. FASTGraph charts below illustrate the overvaluation of the three largest stock holdings in QQQ - Apple Inc. (AAPL), Microsoft Corporation (MSFT), and NVIDIA Corporation (NVDA). Stock price in black compared to the price if the stock was at its 20-year average P/E in blue. These three stocks make up 27% of the NASDAQ and constitute 3 of the 7 Magnificent Seven stocks. The future returns of the Nasdaq and the Magnificent Seven would be in the single digits out to 2026 if they revert to their long-term price multiple. Apple Price History (FAST Graphs)Microsoft Price History (FAST Graphs)Nvidia Price History (FAST Graphs) Going Beyond the S&P 500 I performed the same analysis on fifty-four different mutual and exchange-traded equity funds. The funds were Vanguard, Fidelity, and Schwab funds plus some alternate ETFs. The funds included Small S, Mid M, Large cap L funds, Growth G, Blend B, Value V funds plus sector and income-oriented funds. The tables below list each fund's type, weighted market cap, valuation, risk, estimated future return, and rating from Morningstar. The funds are ranked by estimated future return. The S&P 500 is highlighted in yellow. Stock Fund Value and Return Analysis - Tiers 1-3 (Morningstar, Vanguard, Author)Stock Fund Value and Return Analysis - Tiers 4-6 (Morningstar, Vanguard, Author) I broke the funds into the 6 tiers shown with heavy lines in the table. The first tier of funds are funds with estimated annual returns through 2026 above 25% and are primarily Mid-Cap Value Funds. Two energy sector funds and one Small-Cap Blended Fund made the tier. The funds in the tier combined the lowest P/E ratios, lowest PEG ratios, highest safety margins, and highest estimated returns. Mid-Cap Value appears to be the sweet spot in today's market. Two funds, Vanguard Selected Value Fund Inv (VASVX) and Vanguard U.S. Value Factor ETF ETF Shares (VFVA), have 3-star ratings and The Energy Select Sector SPDR® Fund ETF (XLE) has a 4-star rating. The second tier is funded with estimated returns between 20% and 25%. They are mostly Mid-Cap and Small-Cap Value funds. Both Fidelity Low-Priced Stock Fund No Load (FLPSX) and Pacer US Cash Cows 100 ETF (COWZ) carry the highest 5-star ratings from Morningstar. The third tier is funded with estimated returns between 15% and 20%. They are almost all value or blend funds. Only two growth funds cracked the first three tiers - mid-cap Vanguard U.S. Momentum Factor ETF ETF Shares (VFMO) and small-cap Vanguard Explorer Fund Inv (VEXPX). This is indicative that growth stocks have been bid up of late and consequently have lofty valuations. The fourth tier is funded with estimated returns between 12% and 15%. The fourth tier is a smattering of Large and Mid-Cap, Value, Blend, and Growth funds. The broad general market funds - Vanguard Total Stock Market Index Fund Inst (VTSAX) the S&P 500 (SPY) as well as equal weight versions of those show up in this tier. The fifth tier is primarily growth and overvalued sector funds. Finally, the last tier is funded with estimated annual returns under 5%. These are the Mid and Small-Cap Growth funds. Mid-Cap Growth appears to be a poor place to invest right now compared to Mid-Cap Value. Catherine Wood's 1 star rated ARK Innovation ETF brings up the rear with the worst Morningstar rating, the worst current safety margin, and the worst estimated future return. The chart below compares the current risk of buying the fund today (Safety Margin) to the fundamental performance drivers (Earnings Growth Rate + Dividend Yield). The different symbols are Morningstar's ratings of the funds from lowest (1) to highest (5). The two lines are the average Safety Margin and average Earnings Growth Rate + Dividend Yield. The lines split the funds into the four quadrants shown. There are few funds that fall into the quadrant of high Safety Margin plus higher than average long-term growth rate + dividend yield. Most funds fall into the better than average EG + DY but are overvalued hence riskier longer term or lower than average EG + DY but undervalued hence safer long term. That reflects the current market has been bidding up growth while value stocks have languished. Funds in the lower-than-average EG + DY and lower-than-average Safety Margin quadrant should be avoided. Fund Safety Nargin versus Earnings Growth Rate + Dividend Yield (Morningstar, Vanguard, Author) Some measures of the bidding up of growth can be seen in the plot of the Current Forward P/E versus the Earnings Growth Rate below. Whereas the Fair Value P/E has a 0.65 multiple on increase in P/E with increasing earnings growth and the Justified P/E has a 1.0 multiple, the current market is pricing a 1.71 increase in P/E for each increasing percentage of earnings growth rate. Higher growth rate stocks are being bid up well past fair value or historic norms. Current fund forward Price-Earnings Ratio versus estimated Earnings Growth Rate (Morningstar, Author) The next chart is a plot of Estimated Return versus Safety Margin. Estimated Fund Return versus Safety Margin (Morningstar, Vanguard, Author) It is instructive to compare the two funds that have the highest and lowest estimated returns - Alerian MLP ETF (AMLP) which is a fund composed of energy Master Limited Partnerships and Cathy Wood's flagship ARK Innovation ETF (ARKK). Best and Worse Estimated Fund Returns (Morningstar, Author) Morningstar's estimated earnings growth of the stocks in AMLP is higher than ARKK. Add in the dividend yield and AMLP's annual growth in earnings, and its dividend yield is almost twice that of ARKK. At the same time, AMLP's forward P/E is less than a third of ARKK's. That translates into an 87% safety margin for AMLP compared to a negative 62% safety margin for ARKK. If one invested in both funds, an investor has a chance of more than doubling their money by the end of 2026 investing in AMLP versus losing 10% investing in ARKK. AMLP, for me, is a clear winner compared to ARKK. Free Cash Flow Funds Five of the funds emphasize high Free Cash Flow Yield in their stock selection - Amplify Cash Flow Dividend Leaders ETF (COWS), Pacer US Cash Cows 100 ETF (COWZ), Pacer US Small Cap Cash Cows 100 ETF (CALF), Victoryshares Free Cash Flow ETF (VFLO) and Distillate U.S. Fundamental Stability & Value ETF (DSTL). As shown below, Free Cash Flow Yield has been a successful valuation metric in the past. High Free Cash Flow Yield has led to the highest returns. High Free Cash Flow Yield has led to superior returns (Pacer) Comparing these funds to the S&P 500 is below. The Free Cash Flow Yield funds are undervalued. They have high safety margins and offer potential superior returns to the S&P 500 and most of the other equity funds. Morningstar gives COWZ its highest 5-star rating and gives CALF, VFLO, and DSTL a rating of 4. Further details on investing in high Free Cash Flow Yield funds can be found here Free Cash Flow Funds Free Cash Flow Yield metric fund analysis (Morningstar, Author) Broad Market Funds The valuation and estimated returns of several broad market funds compared to the S&P 500 are shown below. These include the broad market fund Vanguard Total Stock Market Index Fund Inst (VTSAX), an equal-weighed version of the Invesco S&P 500® Equal Weight ETF (RSP), and other equal-weight versions of the market Invesco S&P 100 Equal Weight ETF (EQWL) and iShares MSCI USA Equal Weighted ETF (EUSA). The estimated return of RSP is similar to the S&P 500, but it only has a 2-star rating from Morningstar. The Vanguard Total Market fund adds small and mid-caps to the S&P 500 funds. It is cap-weighted and heavily weighted with the S&P 500's top market cap stocks. Technology, the largest component of the portfolio at 31.6%, is only slightly less than the amount of technology stocks (32.9%) in the S&P 500. There is little to recommend buying the three-star VTSAX over the four-star S&P 500. The only broad market fund that looks more attractive than the S&P 500 is the 5-star rated EQWL. Technology only makes up 14.8% of the fund's portfolio. It falls, however, in the worst quadrant with a worse-than-average safety margin combined with a worse-than-average earnings growth rate plus dividend yield. Broad Market fund analysis (Morningstar, Author) Income Funds Several of the equity funds are considered income funds. They are listed below. Note that the dividend yields are the income dividends. Two of the funds - Cohen & Steers Infrastructure Fund (UTF) and Reaves Utility Income Trust (UTG) - give higher distribution yields, but most of their distributions are cap gains or return of capital. You could do something similar with any fund by withdrawing capital gains and principal periodically. That will reduce your potential investment value over time. The 2-star rated Alerian MLP ETF (AMLP) stands out as having the highest dividend yield, largest safety margin, and highest estimated return. Its potential outperformance may justify purchases, even though it only carries a 2-star rating from Morningstar. The 4 and 3-star rated Schwab U.S. Dividend Equity ETF (SCHD) and Vanguard High Dividend Yield Index Fund Inst (VHYAX) are also worthy of consideration for income-oriented investors. Income oriented fund analysis (Morningstar, Author) Sector Funds The sector funds are listed below. The energy sector is the only undervalued sector in the fifty-four funds analyzed. The three energy sector funds have positive safety margins, good dividend yields, and estimated returns two to three times the estimated S&P 500 return. Both Technology and Healthcare funds are overvalued at the present time with returns estimated to be below that of the S&P 500. The Fidelity Select Semiconductors Portfolio No Load (FSELX) is the best of the Technology fund lot. Sector fund analysis (Microsoft, Author) Best Funds The funds worthy of being purchased are shown in the table below. I added a year-to-date return column. The funds are Tier 1 funds plus other funds that have the highest estimated returns and carry the best ratings - 4 and 5 stars - by Morningstar. The best funds to purchase now, in my opinion, are highlighted in blue. In The Energy sector, AMLP has both the highest safety margin and estimated return of any fund. Undervalued 3-star rated VASVX has the second highest estimated return coupled with a safety margin over 47%. Unrated COWS has the highest estimated return of all the Free Cash Flow oriented funds. 5-Star rated COWZ would be a suitable replacement to COWS but comes with a little lower safety margin and estimated future return. VFVA is the next highest estimated return non-sector stock fund. I like 4-Star SYLD better than 2-Star VEVFX because its safety margin and estimated returns are similar to VEVFX but carry a higher rating than VEVFX. 5-star rated Fidelity Low-Priced Stock Fund No Load (FLPSX) has the highest estimated return of the remaining Tier 2 funds. The funds above are all mid- and small-cap funds. A balanced portfolio should have large, mid, and small caps. And have both growth and value stocks. It is difficult to find large-cap funds that currently have positive safety margins. The only large-cap fund that has a positive safety margin and higher estimated return than the S&P 500 is the 4-star rated Schwab U.S. Dividend Equity ETF (SCHD). 4-Star rated blended large cap Fidelity Large Cap Stock (FLCXS) is worth consideration as it has about double the earnings growth of SCHD with similar estimated returns. Finally, some form of S&P 500 fund should be part of a balanced portfolio as it gives exposure to growth stocks, which the above funds lack. The best funds are also noted in blue in the two charts above. Best Funds to Invest in Today (Morningstar, Vanguard, Author) Best Funds Portfolio A balanced portfolio with 50% large-cap and 50% mid- and small-cap funds is shown below. 37% of the portfolio is invested in a large-cap growth S&P 500 fund. 13% is invested in the large-cap value SCHD fund. 10% is invested in each of the five recommended funds with the highest estimated return. This portfolio goes beyond just investing in the S&P 500. The weighted average safety margin is 19%, better than the S&P 500 negative 25%. The estimated average return of the portfolio is about 70% higher than the S&P 500. Portfolio of the Best Funds (Morningstar, Vanguard, Author) Risks to Investors There are four principal risks to investors. The first is that the stocks in the funds do not achieve their estimated long-term earnings growth rates. The second risk is that the undervalued stocks in the undervalued funds remain undervalued and do not revert to their longer-term price multiples over the next 2 1/2 years. If this happens and the P/Es of the funds do not change, their price would still appreciate at their earnings growth rate, while an investor would collect a dividend yield. In the case of the best portfolio, earnings would appreciate 10.8% a year. Add in the 2.5% dividend yield and an investor could earn a 13.2% annual return, which is similar to the S&P 500's estimated return while waiting for price multiples to revert to long-term mean. The third risk is that the fund manager substantially changes the makeup of the fund.  Finally, the fourth risk is the risk of an economic downturn, which may impact small and mid-caps more than large caps. That said, value investing does just fine in recessions. 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