Return on equity (ROE), a measure of profitability in relation to the equity in a business, is another popular metric that can mislead investors. From its reliance on accounting earnings to its susceptibility to manipulation (often to benefit executive compensation), ROE lacks the necessary analytical rigor to support diligent investment decisions. Investors that rely on ROE are in the Danger Zone. Unattractive Stocks with Misleading “Profitability” For a number of reasons that we’ll discuss below, ROE can make companies appear much more profitable than they truly are. Figure 1 highlights the five Unattractive-or-worse rated stocks with the most misleading ROEs in

Don’t Trust ETF Labels There are at least 44 different Technology ETFs and at least 225 ETFs across eleven sectors. Do investors need 20+ choices on average per sector? How different can the ETFs be? Those 44 Technology ETFs are very different. With anywhere from 25 to 358 holdings, many of these Technology ETFs have drastically different portfolios, creating drastically different investment implications. The same is true for the ETFs in any other sector, as each offers a very different mix of good and bad stocks. Consumer Non-cyclicals ranks first for stock selection. Energy ranks last. Details on the Best & Worst

Fiduciary Duties Need to Extend to Research Most of the coverage of the SEC’s recent proposal to replace the DOL Fiduciary Rule has focused on the different standards for brokers vs. advisors and the shortcomings of a disclosure-based approach to regulation. We agree with many of these criticisms, as we wrote last week before the proposal was released. However, the SEC’s proposal contains an even more fundamental flaw. Even if brokers were held to a fiduciary standard of conduct, the ambiguous interpretation of the fiduciary Duty of Care makes any regulation difficult to enforce and confusing for all parties. The SEC needs to offer a more

Investing in a company without thoroughly analyzing all of its 10-Ks and 10-Qs is like hiking in unfamiliar terrain without a map or GPS. Even if you’re physically fit, you’re putting yourself at unnecessary risk by not being as informed as you should be about the journey you’ve undertaken. A new study from Alan Crane, Kevin Crotty, and Tarik Umar of Rice University shows just how important reading financial filings can be. The authors found that funds accessing SEC filings in a given month averaged 1.5% higher annualized returns than those that didn’t download any filings. Sadly, the study also found that