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.