Monthly Archives: December 2010

Commodity ETF Momentum and Roll Yield Rankings

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Momentum and roll yield are two of the most commonly discussed strategies relating to commodity future investing. These two factors are the two factors that determine commodity selection in the Summerhaven Dynamic Commodity Index, the underlying index for the United States Commodity Index Fund (USCI). The Summerhaven Dynamic Commodity Index holds the seven commodities with the highest roll yield, and the seven commodities not already selected with the highest 12 month price change. This is a bit closer to the screening approach, than the ratings or “one number” approach that I prefer, so I thought I would combine the rankings of the two indicators for commodity ETFs and ETNs.

Notes:

  • I used the performance of the ETFs or ETNs to measure momentum. This can be quite different from the price performance of the actual commodity due to the effect of the roll yield.
  • To measure momentum for Corn, Platinum, and Palladium where the ETFs haven’t existed for a year, I used the Dow Jones-UBS Corn TR index, the platinum spot price, and the palladium spot price.
  • I added in the iPath Grains ETN (JJG) and the iPath Livestock ETN (COW) because the majority of the commodities held in those sectors are not available in ETP form.
  • The total ranking is a ranking of the sum of the momentum and roll yield rankings.

Strategy Weekly – December 19

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This is a summary of several strategies available on vectorgrader.com for those who just visit the blog or who prefer receiving an email.

Market Model

This week, our market model dropped its exposure about 15% to 83.55%, marking the most significant position below 100% in a few months. Last week the exposure was reduced below 100%, but only by a smidgen. This change is largely a result of the interest rate’s signal change from partially positive to negative. Ten year treasury rates have been rising quickly causing the trend indicators to change.

Market Rotation / TAA

Small Cap Stocks iShares Russell 2000 Index Fund IWM 1
Emerging Markets Vanguard Emerging Mkts ETF VWO 2
Commodities PowerShares DB Commodity Index Fund DBC 3
Gold iShares Gold Trust IAU 4
Large Cap Stocks iShares S&P 500 Index Fund IVV 5
Real Estate iShares Cohen & Steers Realty Majors Index Fund ICF 6
International Stocks iShares MSCI EAFE Index Fund EFA 7
Short Term Treasuries iShares Barclays 1-3 Year Treasury Bond Fund SHY 8
Long Term Treasuries iShares Barclays 20+ Year Treasury Bond Fund TLT 9

Minor Markets

Small Cap U.S. Stocks iShares Russell 2000 Index Fund IWM 1
Precious Metals PowerShares DB Precious Metals Fund DBP 2
Agriculture PowerShares DB Agriculture Fund DBA 3
Asia iShares S&P Asia 50 Index Fund AIA 4
Africa Market Vectors Africa Index ETF AFK 5
Middle East Market Vectors Gulf States Index ETF MES 6
International Small Cap iShares MSCI EAFE Small Cap Index Fund SCZ 7
Emerging Markets Small Cap SPDR S&P Emerging Markets Small Cap ETF EWX 8
Base Metals PowerShares DB Base Metals Fund DBB 9
Australia iShares MSCI Australia Index Fund EWA 10
Latin America iShares S&P Latin America 40 Index Fund ILF 11
Canada iShares MSCI Canada Index Fund EWC 12
Large Cap U.S. Stocks iShares S&P 500 Index Fund IVV 13
Real Estate iShares Cohen & Steers Realty Majors Index Fund ICF 14
Japan iShares MSCI Japan Index Fund EWJ 15
Japan Small Cap SPDR Russell/Nomura Small Cap Japan ETF JSC 16
Europe Vanguard European ETF VGK 17
High Yield Bonds SPDR Barclays Capital High Yield Bond ETF JNK 18
Energy PowerShares DB Energy Fund DBE 19
Emerging Market Debt iShares JPMorgan USD Emerging Markets Bond Fund EMB 20
International Treasury Bonds SPDR Barclays Capital International Treasury Bond ETF BWX 21
Short Term Corporate Bonds iShares Barclays 1-3 Year Credit Bond Fund CSJ 22
Short Term Treasuries iShares Barclays 1-3 Year Treasury Bond Fund SHY 23
Long Term Treasuries iShares Barclays 20+ Year Treasury Bond Fund TLT 24

Sector Rotation

Materials Vanguard Materials ETF VAW 1
Consumer Discretionary Vanguard Consumer Discret ETF VCR 2
Energy Vanguard Energy ETF VDE 3
Industrials Vanguard Industrials ETF VIS 4
Telecommunications Vanguard Telecommun Serv ETF VOX 5
Information Technology Vanguard Information Tech ETF VGT 6
Consumer Staples Vanguard Consumer Staples ETF VDC 7
Financials Vanguard Financials ETF VFH 8
Health Care Vanguard Health Care ETF VHT 9
Utilities Vanguard Utilities ETF VPU 10

Bond Rotation

High Yield Bonds SPDR Barclays Capital High Yield Bond ETF JNK 1
Emerging Market Bonds iShares JPMorgan USD Emerging Markets Bond Fund EMB 2
International Government Bonds SPDR Barclays Capital International Treasury Bond ETF BWX 3
Treasury Notes iShares Barclays 7-10 Year Treasury Bond Fund IEF 4
Short Term Corporate Bonds iShares Barclays 1-3 Year Credit Bond Fund CSJ 5
Short Term Treasuries iShares Barclays 1-3 Year Treasury Bond Fund SHY 6

Currency Rotation

Currency Similar ETF ETF Ticker Total Rank Interest Rate Rank Valuation Rank Momentum Rank
Australian Dollar CurrencyShares Australian Dollar Trust FXA 1 1 8 1
New Zealand Dollar WisdomTree Dreyfus New Zealand Dollar BNZ 2 2 4 5
Swedish Krona CurrencyShares Swedish Krona Trust FXS 3 3 7 3
Canadian Dollar CurrencyShares Canadian Dollar Trust FXC 4.5 4.5 5 6
United States Dollar iShares Barclays Short Treasury Bond SHV 4.5 7.5 1 7
British Pound CurrencyShares British Pound Sterling Tr FXB 6 6 2 8
Euro CurrencyShares Euro Trust FXE 7 4.5 3 9
Swiss Franc CurrencyShares Swiss Franc Trust FXF 8 7.5 9 2
Japanese Yen CurrencyShares Japanese Yen Trust FXY 9 9 6 4

Sector Valuation and Momentum Rankings

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Valuation is one of the largest factors determining long term returns. Momentum, on the other hand, has been more predictive in the intermediate term. By combining both, we are trying to pick sectors that have both long term and intermediate term tailwinds.

To measure valuations of each sector, I used the median P/E, Earnings Yield, P/S, P/B and PEG ratio. This method is not perfect as some sectors’ valuation metrics tend to revert to different levels. It can, at least, give us something of an idea about where valuations are. First, the sectors were sorted by each of the metrics and given a score based on their position. The scores of each metric were then added up and this result was ranked relative to the other sectors’ score.

For comparing momentum, I used the sum of the price performance over the last 13, 26, and 52 weeks of both the market cap weighted index and the equal weighted index for each sector.

For more ETF ideas, check out our ETF ratings.
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New Strategy – ETF Ratings

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Over the last few weeks, we’ve been creating an ETF rating system for VectorGrader.com. Today, we’ve finally finished working on it and it is now available on VectorGrader.com. As with our stock rating system, the individual ratings are available for free, but full access is only for premium members. Also, because we now have ratings for ETFs, they can be added to the portfolio.

About the ETF Rating System

The ETF rating system rates ETFs on four primary factors, momentum, mean reversion, expenses, and liquidity.

The momentum component is intended to capture returns available form the momentum effect in ETFs. It is calculated as the average percentile ranking of the 13, 26, 39 and 52 week price change. Because momentum is one of the primary factors driving returns, it is given a double weight in the composite rating.

While over the long term, momentum is effective, in the short term, prices tend to reverse direction. This is where the mean reversion sub-rating comes in. The mean reversion rating is the average percentile ranking of the 1, 2, 3, and 4 week price change where a lower return is better. This means that ETFs with the worst performance during the last 1-4 weeks will be given the highest mean reversion rating.

Because the expense ratio can be the entire difference in performance between two similar ETFs, we also included an expense rating. This is a simple percentile ranking of the expense ratio relative to all other ETFs.

The liquidity rating scores ETFs based on average volume and assets. This sub-rating ensures that top rated ETFs have sufficient liquidity to trade.

These four sub-ratings are averaged together, then ranked, resulting in the composite rating for an ETF. This rating identifies the ETFs that have the most potential to outperform the stock market.

Because some investors may already have a preferred set of ETFs they trade, we also calculate a price action rating for each ETF. This is a combination of the momentum and mean reversion sub-ratings.

Strategy Weekly – December 12

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This is a summary of several strategies available on vectorgrader.com for those who just visit the blog or who prefer receiving an email.

Market Model

Market Rotation / TAA

iShares Russell 2000 Index IWM 1
Vanguard Emerging Markets Stock ETF VWO 2
SPDR Gold Shares GLD 3
PowerShares DB Commodity Index Tracking DBC 4
SPDR S&P 500 SPY 5
iShares Cohen & Steers Realty Majors ICF 6
iShares MSCI EAFE Index EFA 7
SPDR Barclays Capital 1-3 Month T-Bill BIL 8
iShares Barclays 20+ Year Treas Bond TLT 9

ETF Minor Market Rotation

iShares Russell 2000 Index IWM 1
PowerShares DB Precious Metals DBP 2
SPDR S&P Emerging Markets Small Cap EWX 3
Market Vectors Gulf States Index ETF MES 4
Market Vectors Africa Index ETF AFK 5
iShares S&P Asia 50 Index AIA 6
PowerShares DB Agriculture DBA 7
iShares MSCI EAFE Small Cap Index SCZ 8
iShares MSCI Canada Index EWC 9
iShares MSCI Australia Index EWA 10
PowerShares DB Base Metals DBB 11
SPDR S&P 500 SPY 12
iShares Cohen & Steers Realty Majors ICF 13
iShares S&P Latin America 40 Index ILF 14
Vanguard European ETF VGK 15
SPDR Barclays Capital High Yield Bond JNK 16
iShares MSCI Japan Index EWJ 17
PowerShares DB Energy DBE 18
SPDR Russell/Nomura Small Cap Japan JSC 19
iShares JPMorgan USD Emerg Markets Bond EMB 20
SPDR Barclays Capital Intl Treasury Bond BWX 21
iShares Barclays 1-3 Year Credit Bond CSJ 22
iShares Barclays 1-3 Year Treasury Bond SHY 23
iShares Barclays 20+ Year Treas Bond TLT 24

iShares / Fidelity ETFs

iShares Russell 2000 Index IWM 1
iShares MSCI EAFE Small Cap Index SCZ 2
iShares MSCI Emerging Markets Index EEM 3
iShares S&P 500 Index IVV 4
iShares MSCI ACWI Index ACWI 5
iShares JPMorgan USD Emerg Markets Bond EMB 6
iShares iBoxx $ Invest Grade Corp Bond LQD 7
iShares Barclays TIPS Bond TIP 8
iShares Barclays Aggregate Bond AGG 9

Sector Rotation

Vanguard Consumer Discretionary ETF VCR 1
Vanguard Materials ETF VAW 2
Vanguard Energy ETF VDE 3
Vanguard Industrials ETF VIS 4
Vanguard Information Technology ETF VGT 5
Vanguard Telecom Services ETF VOX 6
Vanguard Financials ETF VFH 7
Vanguard Consumer Staples ETF VDC 8
Vanguard Health Care ETF VHT 9
Vanguard Utilities ETF VPU 10

Fidelity Funds

Fidelity Select Technology FSPTX 1
Fidelity Select Consumer Discretionary FSCPX 2
Fidelity Select Industrials FCYIX 3
Fidelity Select Energy FSENX 4
Fidelity Select Materials FSDPX 5
Fidelity Select Health Care FSPHX 6
Fidelity Select Telecommunications FSTCX 7
Fidelity Select Consumer Staples FDFAX 8
Fidelity Select Financial Services FIDSX 9
Fidelity Select Utilities Portfolio FSUTX 10

Bond Sector Rotation

SPDR Barclays Capital High Yield Bond JNK 1
iShares JPMorgan USD Emerg Markets Bond EMB 2
SPDR Barclays Capital Intl Treasury Bond BWX 3
iShares Barclays 7-10 Year Treasury IEF 4
iShares Barclays 1-3 Year Credit Bond CSJ 5
iShares Barclays 1-3 Year Treasury Bond SHY 6

Currency Rotation

Currency Similar ETF ETF Ticker Total Rank Interest Rate Rank Valuation Rank Momentum Rank
Australian Dollar CurrencyShares Australian Dollar Trust FXA 1 1 8 1
New Zealand Dollar WisdomTree Dreyfus New Zealand Dollar BNZ 2 2 5 4
Canadian Dollar CurrencyShares Canadian Dollar Trust FXC 3.5 4 4 6
Swedish Krona CurrencyShares Swedish Krona Trust FXS 3.5 4 7 3
British Pound CurrencyShares British Pound Sterling Tr FXB 4.5 6 2 7
Euro CurrencyShares Euro Trust FXE 4.5 4 3 8
United States Dollar iShares Barclays Short Treasury Bond SHV 7 7.5 1 9
Swiss Franc CurrencyShares Swiss Franc Trust FXF 8 7.5 9 2
Japanese Yen CurrencyShares Japanese Yen Trust FXY 9 9 6 5