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Because so many people are investing in ETFs these days, I thought it might be helpful to show everyone how I, as an analyst, go about researching them. The real beauty of ETFs is that they (unlike mutual funds) publish their current holdings on each parent companies website for all to see. With mutual funds you are lucky if you get to see the fund holdings on a semi-annual basis.

The following is the way I do a quick analysis of an ETF.

For this example, I am going to use INVESCO Powershares Value Line Timeliness Select Portfolio (PIV) (see here).

The reason I picked PIV is simply because everyone is very aware of the Value Line Investment Survey and I have always been interested in how their picks, based on their timeliness model, would do in a real portfolio.

Before we start, here are the most current holdings of PIV.

As you can see, there are 50 positions and if you download them into Excel you will also get each holding's weighting as part of the total portfolio. This is the area, which allows for almost real time analysis to be done and why I find ETFs to be excellent candidates for analysis.

As the table below shows, I have analyzed each holding by its Return on Equity (ROE), but if you want you can use any ratio you want and even better do multiple tests repeating the process with PE, PEG, ROIC etc…

First here is the completed analysis;

Name

TICKER

WEIGHT

ROE

RESULT

AFLAC Inc.

AFL

1.99%

20.05

0.40

Alcon Inc.

ACL

2.10%

48.24

1.01

Alliance Data Systems Corp.

ADS

2.01%

42.81

0.86

America Movil S.A.B. de C.V. (NYSE:ADS)

AMX

1.88%

42.47

0.80

American Greetings Corp.

AM

2.06%

-28.90

-0.60

Apple Inc.

AAPL

1.86%

23.35

0.43

Bio-Rad Laboratories Inc. (Cl A)

BIO

1.90%

8.90

0.17

Blackrock Inc.

BLK

2.04%

5.33

0.11

Boston Beer Co. (Cl A)

SAM

2.12%

18.09

0.38

CarMax Inc.

KMX

2.30%

8.92

0.20

Cash America International Inc.

CSH

2.05%

13.26

0.27

Catalyst Health Solutions Inc.

CHSI

1.98%

15.98

0.32

CEVA Inc.

CEVA

2.08%

5.00

0.10

Coach Inc.

COH

2.06%

38.75

0.80

Concur Technologies Inc.

CNQR

2.14%

4.86

0.10

Consol Energy Inc.

CNX

2.07%

35.40

0.73

Corrections Corp. of America

CXW

1.95%

11.14

0.22

Deckers Outdoor Corp.

DECK

1.89%

23.45

0.44

Diamond Offshore Drilling Inc.

DO

1.94%

6.90

0.13

ev3 Inc.

EVVV

2.00%

-31.48

-0.63

F5 Networks Inc.

FFIV

2.08%

12.07

0.25

Flowserve Corp.

FLS

1.85%

27.66

0.51

Fossil Inc.

FOSL

1.96%

13.98

0.27

Fuel Systems Solutions Inc.

FSYS

1.69%

15.97

0.27

Gap Inc.

GPS

1.86%

21.34

0.40

Global Payments Inc.

GPN

1.97%

3.86

0.08

Google Inc. (Cl A)

GOOG

1.99%

16.11

0.32

Hospira Inc.

HSP

1.96%

18.97

0.37

IDEXX Laboratories Inc.

IDXX

1.97%

24.51

0.48

Informatica Corp.

INFA

2.12%

15.00

0.32

Intuitive Surgical Inc.

ISRG

2.00%

15.99

0.32

J. Crew Group Inc.

JCG

2.13%

24.54

0.52

La-Z-Boy Inc.

LZB

1.96%

-14.65

-0.29

MasterCard Inc. (Cl A)

MA

2.09%

56.52

1.18

Medicis Pharmaceutical Corp.

MRX

2.15%

4.54

0.10

NII Holdings Inc.

NIHD

2.15%

14.40

0.31

Perrigo Co.

PRGO

1.89%

18.01

0.34

Polo Ralph Lauren Corp.

RL

1.99%

14.64

0.29

priceline.com Inc.

PCLN

2.00%

47.29

0.95

Ross Stores Inc.

ROST

1.92%

37.96

0.73

Salesforce.com Inc.

CRM

2.09%

10.03

0.21

Silicon Laboratories Inc.

SLAB

2.13%

7.10

0.15

Solera Holdings Inc.

SLH

1.96%

13.37

0.26

Starbucks Corp.

SBUX

2.07%

14.12

0.29

Telefonica S.A. (ADS)

TEF

1.86%

39.89

0.74

TJX Cos.

TJX

1.86%

42.21

0.78

Urban Outfitters Inc.

URBN

2.08%

16.34

0.34

Viacom Inc. (Cl B)

VIA.B

1.93%

14.36

0.28

Walgreen Co.

WAG

1.80%

14.73

0.26

Wright Express Corp.

WXS

2.07%

57.84

1.20

TOTAL

18.51%

Since we already have the weightings and have inserted the ROE numbers ourselves, we are now able to determine the ROE for the whole portfolio. The way this is done is by simply multiplying the percentage weighting by the ROE for each holding. Once you have a result for each holding, just add up the results and you get a number of 18.51%, which is the ROE result for the PIV ETF's total portfolio.

So now that we have that result, what do we do with it now?

Basically since you have the total result, you can now compare that to either the total results of any other ETF or even better, to the DJIA or S&P 500, Russell 2000 etc….

I use the DJIA as it only requires me to analyze 30 stocks, but also is made up of some of the most powerful companies in the world.

Here are the results of a similar analysis for the DJIA 30 stocks by weighting;

Dow Jones Industrial Average Components

STOCK

% WEIGHTING

ROE

Result

IBM

9.31

56%

5.21

Chevron

5.92

14%

0.82

3M

5.73

23%

1.30

ExxonMobil

5.57

18%

1.01

United Technologies

4.84

20%

0.95

Johnson & Johnson

4.59

27%

1.22

McDonalds

4.57

33%

1.50

Procter & Gamble

4.55

21%

0.95

Caterpillar

4.28

15%

0.62

Coca-Cola

4.15

26%

1.09

Wal Mart

3.88

20%

0.79

Travelers

3.88

12%

0.46

Boeing

3.73

-1%

-0.04

Hewlett Packard

3.72

19%

0.72

JPMorgan Chase

3.29

4%

0.14

American Express

2.75

13%

0.34

DuPont

2.49

7%

0.17

Merck

2.41

38%

0.91

Verizon Communications

2.27

12%

0.27

Microsoft

2.15

37%

0.79

Kraft Foods

2.13

10%

0.21

Disney

2.12

10%

0.21

AT&T

1.98

11%

0.22

Home Depot

1.93

12%

0.23

Cisco Systems

1.78

15%

0.27

Intel

1.47

6%

0.09

Pfizer

1.31

12%

0.16

Bank of America

1.13

0%

0.00

General Electric

1.12

10%

0.11

Alcoa

0.96

-15%

-0.14

Total

20.61

As the table above shows, the total ROE for the DJIA is 20.61%, compared to 18.51% for the PIV.

These results show that the DJIA is more efficient then the PIV and if that’s the case the DJIA should outperform the PIV.

Here is the long term chart of PIV vs. DJIA 30:

The above chart clearly shows that the DJIA handily beat PIV over a 5 year period. I always go back 5 years when I do my side by side comparison as I am looking to see if the ETF's past performance mirrored the results that I got from my analysis. I welcome you to rip open your ETFs and analyze their holdings, so you can see what you actually own and not just buy on pure speculation.

This method can also be used to measure your current holdings and see if your stock picks can pass a similar stress test and see how they stack up to the DJIA 30. I have used this method for years and it really has helped me stress test my clients' portfolios and make sure they have the potential to beat the benchmarks. You can basically use any ratio you want to compare one product with another. You can also use it to compare, let’s say, a Brazil ETF to a China ETF and see which may have better numbers.

A word of warning before I close: Once you start using this method you will not be able to stop as it is a lot of fun as well as work. In the end, you will have a much better understanding of what you own and that is all that matters.

The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of Peter “Mycroft” Psaras, and should not be construed as personalized investment advice.

It should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

Disclosure: Author holds long positions in AAPL, IBM, MSFT, no positions in the others

Source: How to Stress Test Your ETFs