8 ETFs You Might Want to Consider Taking Action On

The following US Equity ETFs seem ripe for immediate action.

  • INVESCO DYNAMIC MARKET ETF (PWC)
  • SPDR S&P 400 MID CAP GRW ETF (MDYG)
  • INVESCO S&P SMCP CONSR DISCR (PSCD)
  • ISHARES PHLX SEMICONDCTR ETF (SOXX)
  • VANGUARD REAL ESTATE ETF (VNQ)
  • ISHARES SELECT DIVIDEND ETF (DVY)
  • REALITY SHARES DIVS ETF (DIVY)
  • FIRST TRUST NATURAL GAS (FCG)  

As you can see, we have a broad variety of sectors represented here. But they share a common trading theme based on a responsiveness analysis using 1-month potential returns.

From among all US equity ETFs in our system to which we assign Power Ranks (673 at present), I picked those that have historically shown themselves to be most sensitive to rating changes, whether from Neutral to Bullish, or Neutral to Bearish. Sensitivity is defined in terms of one-month price movement following the rating change.

Here are details of the process I used:

  1. I calculated the 1-month change of every ETF for every day over the last 10 years 
  2. Then I ranked that 1-month change on a universe-relative basis (1-100), with the highest 1 month returns receiving a score of 100. 
  3. I tested all ETFs to see if they had a ratings change from Neutral to Bullish over the last 10 years.
  4. For every ETF that triggered a change from Neutral to Bullish over the last 10 years, I noted every universe-relative price-change rank and averaged them all.
  5. Then I did the same thing for all of the Neutral to Bearish shifts; here, it was the worst price change that was scored 100.
  6. To get the overall responsiveness score, I created a weighted average of the bullish responsiveness score and the bearish responsiveness score, using the number of bullish and bearish shifts to weight the overall score. 
  7. Once I had each ETF’s overall responsiveness score, I checked how many absolute times over the last 10 years each ETF changed ratings. I eliminated the ETF from the universe if it did not change ratings at least 8 times. 
  8. I then also eliminated the ETF from the universe if its responsive score was not greater than 50.
  9. I consider a signal to have been generated if there is a rank change from Neutral to either Bullish or Bearish for an ETF with a Universe-Relative Responsiveness score of at least 50.

NOTE: For future iterations, I am considering testing relative performance or strictly positive performance as opposed to absolute performance. I am also considering using a DEMA (Double Exponential Moving Average) as a means to filter in recency bias — in order to weight the overall responsiveness score. 

Of the approximately 230 highly responsive ETFs, approximately eight of them triggered signals this week. 

Bullish ActionBearish Action
SOXXDIVY
PWCDVY
MDYGVNQ
PSCDFCG

The table below shows the Responsiveness ratings, total number of changes, Bullish Changes, Bearish Changes (the last 4 columns respectively):

As you can see from the absolute numbers, the overall responsiveness scores are in the 50s range. In a perfect world, we would hope for higher, but if an ETF is more responsive than half of the market, that suggests a tendency to outperform.

Relative to an SPY Benchmark, this is how the strategy historically performed for these 8 stocks:

For the four  Bullish ETFs, having adhered to the bullish signals would have led to average outperformance (excess over the SPY) of 5.84% after 1 month.

For the four Bearish ETFs, having adhered to the bearish signals would have led to an average underperformance (excess under the SPY) of 6.34 %

Avg Information RatioAvg Active Return
Bullish Action ETFs0.89933653575.84%
Bearish Action ETFs-0.193-6.34%

Long MDYG,PSCD,PWC,SOXX

Karina Kovalcik brings a fresh perspective to investing, having been in the industry for two years. She graduated in 2017 with a degree in Economics from Yale, where she also played soccer. When she makes any blonde mistakes, she usually blames it on all of the soccer balls she’s taken to the head. She joined the Chaikin Analytics team as a Quant and really enjoys crunching the numbers. When she’s not at work, Karina is either running around on the soccer field or spending time in the great outdoors. Karina is a free spirit who loves to travel and experience new foods and cultures; she’s always looking for her next adventure. Follow her on twitter @FinancialyBlond (1 L, no E, and no she doesn’t struggle with spelling).

  
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