To address this issue, earlier this month I began incorporating a proprietary composite scoring system for all 200 or so tracked ETFs using many of the nightly spreadsheets' key heuristics as presented in the service's introductory video series. I call the resulting scores 'ETFRanks'. As discussed below, the ranks appear to be strong selection criteria for active investors using an intermediate time-frame.
Here is a brief overview of the factors included in the calculation of the ranks:
- Long-Term Trend
- Intermediate-Term Trend
- Relative Strength
- Risk-Reward Profile
- Short-Term Oversold/ Overbought Oscillator State
- Relative Volume/ Liquidity
Cross-Sectional View of Market Status
Each night I create a histogram of the resulting ranks for all the equity-based indices, like so:
The modality of this chart provides me with a strong sense of overall market status. Note how the markets' recent pullback within an environment of upward strength has pushed many of the ETFs into the highest scoring quintile. Also, it is abundantly clear with the strong rightward skew how preternaturally strong this market has been. Lastly, it is also a good touchstone against which to compare any individual ETFs of interest. In the future, I will make note of any major changes to the modality of this chart in my weekly ETF Rewind summary.
As a first-pass test of the out-of-sample efficacy of the ranks, I ran the scores for all the ETFs as of twenty-days ago, and then again as of sixty-days ago. The upper panels of the chart below show the backward looking/ in-sample performance of the ranks as of the date of those respective runs for the two periods (left = 20-days; right = 60-days):
The forward, out-of-sample performance for the same ETFs as ranked in the upper half during the ensuing twenty- and sixty-day periods is then shown in the lower half. As you can see, the relative out-performance/dispersion of the higher ETFRank'ed securities held up admirably.
This has been a very trendy period within a relatively stable beta seeking regime, so I will grant that I need to conduct the same type of testing over a far greater sampling for a thorough evaluation. However, I strongly suspect the ETFRanks will hold up well.
[See also Home of Mrkt Metrics]
As a postscript, this is my personal attempt at an inclusive ranking system. Yes, it's built into the ETFR, and yes I'm keeping it 'proprietary', but I promise that it isn't rocket science and there are no 'magic formulas' involved. Rather, I hope between the article and the comments below that you find enough raw material and inspiration to attempt your own.