The VectorGrader ETF Ratings

The VectorGrader ETF rating system identifies ETFs (technically ETFs and ETNs) that have the potential to outperform over the next 1-3 months. It first scores ETFs on four primary factors, momentum, mean reversion, expenses, and liquidity, then combines them into one rating that can help investors pick ETFs set to outperform.

Momentum Rating

The momentum component is intended to capture returns available from 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 has a double weight in the composite rating.

Mean Reversion 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 have the highest mean reversion rating.

Expense 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.

Liquidity Rating

The liquidity rating scores ETFs based on average volume and assets. This sub-rating ensures that top rated ETFs can be traded without a large bid-ask spread cutting significantly into returns. It also reduces the risk of a top rated ETF being shut down due to low asset levels.

Putting it All Together - The Composite Rating

These four sub-ratings are averaged together, and 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 without the expense and liquidity sub-ratings.

How to use the ETF Ratings

If you do not want the risk of investing in individual stocks and are fine with beating the market by a little bit less than with our stock ratings, than the VectorGrader ETF ratings may be for you.

The best way to use the ETF ratings is to buy several of the top rated ETFs, and sell them when their rating drops below 90. If two of the top rated ETFs are very similar, than only one of the them should be bought. This will ensure that the highest returns are achieved while keeping the number of trades down. It is not a good idea to trade leveraged ETFs or ETNs using the VectorGrader ETF ratings.

The ETF ratings can also be used with a group of ETFs that you select. However, when you do this, you may want to use the price action rank instead of the total rating so the liquidity and expense ratings don't have an effect.