Ranking ETPs

January 25, 2018 08:00 AM

A recent exchange-traded product (ETP) Forum, which included some of the greatest minds in the industry, did not result in a great deal of market forecasts, but did reveal interesting trends.  

Instead of forecasting market direction at ETF Global, we focus on describing the trends we see in the data on the nearly 1,100 funds we track using different quantitative approaches. One of the most potent tools we offer is our Green Diamond Reward Rankings. It gives users the ability to scan and seek out the most appropriate fund in various sectors.  For every unlevered fund in our universe, we use behavioral factors including price momentum, short-interest and implied volatility along with fundamental data to arrive at a score with a value of 1 (least attractive) to 10 (most attractive). ETF Global also provides a Red Diamond score, which rates the riskiness of a fund as measured by volatility and integrity risk (see “Rating ETFs,” below). 

We were surprised by the lack of tech funds, given the way tech stocks dominated in 2017. The SPDR Select Technology ETF (XLK) was up 31% through Dec. 1, while the smaller Powershares Nasdaq Internet ETF (PNQI) was up 36.5%, vs. 18% for the S&P 500. What stood out was the number of dividend or equity income funds, not exactly a space that anyone thinks of as overbought, that had low rankings. This conundrum might offer new users insight into how our system works.  

Our quant rankings give both tech funds a Green Diamond score of around 4.4, indicating a more neutral outlook for the next few months. This is because their recent price momentum has already been waning and neither fund is trading at their highest price metrics. That is not surprising given that tech stocks continue to be the strongest earners heading in the end of 2017. Compare that with the WisdomTree U.S. High Dividend Fund (DHS) and the First Trust Morningstar Dividend Leaders Index Fund (FDL), which have Green Diamond scores between 1.6 and 2.1 thanks to strong price momentum and high price multiples.  Neither fund would be called a strong performer with both slightly lagging behind the Russell 1000 Value Index, but they have made steady gains over the course of the year. Add in the fact that most dividend paying funds are chock-full of value stocks with weaker earnings growth and the lower Green Diamond rankings suddenly become much more understandable.

Looking at the higher-ranking funds doesn’t show any definitive patterns, although a number of biotechnology and pharmaceutical funds are there, including the iShares Nasdaq Biotechnology ETF (IBB) and SPDR S&P Pharmaceuticals ETF (XPH); two high fliers that not so long ago would’ve been sporting scores more in line with those dividend funds. Both saw heavy profit taking in 2015 as the healthcare bubble finally burst, but have found support and made up ground in 2017 and offer a potent combination of strong momentum, high short interest and low price multiples compared to their historical averages that could potentially send them higher from here.  




About the Author

Dan Keegan is an experienced options instructor and founder of the options education site optionthinker.