Top 25 ETF by six month relative strength | stockbee


Top 25 ETF by six month relative strength

Investors follow latest fashions. Recently a book on Exchange Traded Funds ( ETF) promoting 6 month relative strength as primary way to build ETF portfolio has been released. Suddenly people are looking for ways to rank ETF by 6 month momentum.

While a momentum based approach works on ETF, the real art is in the nuances involved in making it work. If you don't understand how momentum works and how to design strategies for entering momentum based vehicles at right time, you will be the last fool to buy them before they reverse. When you use momentum based ranking to invest in ETF top 10 ranked ETF can also be the most extended ETF and just near their top. Without understanding that if you start dabbling in momentum investing you will soon be disillusioned and be searching for next hot book on ETF.

Momentum rankings are very easy to derive. Anyone with basic maths skills and free data sources like Google spreadsheet or excel can easily develop their own ranking method. Momentum or relative strength rankings are arrived at by calculating Rate of Change or ROC.There are many ways to calculate ROC and each of the ways can give you slightly different ranking and each approach has some benefits or short comings.

The easy way to calculate relative strength is by calculating 6 month price change and ranking ETF by it. In Telechart this can be done easily using Price Percent Change 26-Week which is a System sort criteria. The Telechart pcf for it is: 100*(c-c126)/c126.

Another better way to rank ETF by 6 month relative strength is by calculating ROC as a ratio of price to six month average price. The advantage of this approach is it uses average price of last 6 month as against a one price point of six month ago price in earlier ROC calculation. In Telechart this is easy to do using a PCF like c/avgc126.

In addition to ROC rank you must also use some kind of liquidity filter to eliminate ETF with low trading volume. Let us say you want only to focus on ETF trading 100000 plus daily to avoid slippage. Then you can use a sort to eliminate such ETF using a Telechart pcf like minv3>=1000.

Using both these criteria I created a list of 25 ETF that are highest ranked by momentum:

AGQ,Proshares Ultra Silver
BRF,Market Vectors Brazil Small-Cap
DAG,DB Agriculture Double Long ETN
DBS,PowerShares DB Silver Fund
DGP,DB Gold Double Long ETN
ECH,iShares MSCI Chile Index Fund ETF
EDC,Direxion Daily Emerging Markets Bull 3x Shares
EPI,WisdomTree India Earnings Fund ETF
EPU,iShares MSCI All Peru Capped Index Fund
EWD,iShares MSCI Sweden Index Fund ETF
EZA,iShares MSCI South Africa Index Fund ETF
FDN,First Trust Dow Jones Internet Index Fund ETF
FRN,Claymore/BNY Mellon Frontier Markets ETF
GDXJ,Market Vectors Junior Gold Miners ETF
HAO,Claymore/Alphashrs 2 Sm Cap
IDX,Market Vectors Indonesia Index
INP,iPath MSCI India Index ETN
PIE,PowerShares DWA Emerging Markets Technical Leaders Portfolio ETF
RJA,ELEMENTS Linked to the Rogers International Commodity Index - Agriculture Total Return ETN
SIVR,ETFS Silver Trust
SLV,iShares Silver Trust ETF
THD,iShares MSCI Thailand Investable Market Index Fund ETF
TQQQ,ProShares UltraPro QQQ
TUR,iShares MSCI Turkey Investable Market Index Fund ETF
UYM,ProShares Ultra Basic Materials

The top 3 ETF by 6 month momentum or relative strength currently are:

DAG DB Agriculture Double Long ETN

AGQ Proshares Ultra Silver

THD ishares MSCI Thailand Investable Market Index funds

Before you use a momentum or relative strength based approach to invest in ETF, mutual funds or stocks you should spend sometime thoroughly understanding the concept behind momentum and how it works, why it works, when it works, what are the risk involved in using it and so on. If you do not have that conceptual understanding of momentum , you can do great damage to to your account by buying stocks , ETF or mutual funds exactly at wrong time. 

If you are serious about enhancing your understanding of relative strength then I suggest you read a good book on relative strength by Michael Carr. It is one of the best book on that topic. I have written a review of it when it came out in August 2008, if you see the comments on that post the author has also commented on the post. You can see the review below:


Smarter Investing In Any Economy- The Definitive Guide to Relative Strength Investing by Michael Carr

Smarter Investing In Any Economy- The Definitive Guide to Relative Strength Investing by Michael Carr

The book as name suggest goes in to details about using Relative Strength to design a trading strategy. Relative strength based strategies are one of the ways to exploit the momentum anomaly. Relative strength strategies aim to find strongest or weakest stocks, ETFs, or sectors in any market environment and to trade them on long or short side till they maintain there relative strength. Well formulated relative strength based strategies keep you on the right side of market.

The book goes in to details of various ways to rank stocks. Formulas for calculating relative strength using absolute difference, normalised ROC, moving averages, front or back weighted ROC, and standard deviation are detailed.

In the next section the author demonstrates ways to build trading strategy using Relative strength. He goes in to issues like:
  • What vehicles to buy using Relative Strength
  • What time frames for relative strength are ideal
  • When should you buy and sell
  • How should you manage your risk
The author provides a researched strategy using the relative strength. Various application of relative strength for stocks, etf, mutual funds and futures are discussed , to provide further ideas for investors.

Some of the most successful trading methods in the market are based on relative strength . It is one of the proven methods in the market that works. This book provides a good guide to investors interested in learning and applying about relative strength based strategies.

The book certainly is not "The Definitive Guide to Relative Strength Investing " because it is very narrowly focused on one trading system application of relative strength. It could have done a much better job of illustrating many more relative strength based approaches. The first chapter in the book is the worst, it never defines relative strength properly and spends more time trying to repudiate momentum investing, when in fact the entire rational of relative strength investing is based on stock momentum.

In spite of some reservations, this is one of the best books out of 70-80 books on trading I have read so far this year. I highly recommend this book because it contains ideas and concept which can make you money.

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1 comment: said...

Great post and thanks for sharing the book reference. I personally like ranking ETFs by recent gain divided by their volatility - essentially the Sharpe or Sortino ratio. I look to find the ones with the smoothest uptrend.

Best regards. Keep up the great work!