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Peter F. Way, Blockdesk (711 clicks)
ETF investing, CFA, portfolio strategy, long/short equity
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Well, with over 1300 ETFs, and a questionable market outlook, that ought to be easy, eh?

But suppose the folks that every day make big-ticket trades in SPY happen (by putting their firm's capital at risk) think that over the next 3 months a buy of SPY today is odds-on to earn at a +20% annual rate? And they see its upside prospect in that time about double any downside?

Yeah, they do. That's not so questionable a market, is it?

Now, if there are some ETFs that can do four times as well, they can't be IPOs with no market maturity and some hyper-volatility and no downsides yet to be tested. Let's compare apples to apples. (No, not AAPL, that's not an ETF.)

SPY has been buyable more than two decades, longer than any other ETF, has seen lots of market conditions. But terrorist attacks on Wall Street or DC, and massive fraud in mortgage-backed securities are not likely prospects in the next few years, so matchmakers think a reasonable condition for any ETF boxing-ring contender to SPY's title ought to have had a sufficient number of fights in the past 3-5 years.

At today's market outlook by the pros evaluating SPY, it has had some 260 prior days in that time with similar upside-to-downside prospects. Any contender ought to have at least 25 or 30, and been in the game 3 years. And SPY has won (made a profit) in 8 out of every 10 bouts like today's. So any contender needs to do as much.

Well, that narrows the field way down, from over a thousand to a few dozen. A lotta them "coulda-been-a-contender"s are outa shape and don't meet the upside-to downside requirements to fight at this weight level.

But there are a half-dozen that do, and it might be that any of them would give SPY a real beating. Here's how they look at the weigh-in:

(click to enlarge)

The same matchmakers rating SPY have evaluated the contenders' price prospects. A knockout for SPY only takes a 7.6% price gain, while the contenders average +9.2% for the group. SPY's toughest fights have averaged knockdowns to a -4.5% count, while the wanna-bes have taken it on the chin to almost a 6-count (-5.8%). But each side, defender and contenders, come up with the same thrills-to-spills ratio of 1.7 to 1 out there at the right-hand side of the table.

That Range Index thing tells what the judges' forecasts are about each fighter's chances are of losing this match, in percent of the total outcomes possibilities. For SPY, it's 36 chances out of 100 (36% of the price range below today's price), but the contenders do a bit better at 33, collectively.

The next column tells what has actually happened, wins (profits) versus losses, bout by bout, in the matches each one has had at times of similar outlooks. As said before, SPY wins 80 out of every 100. But the challengers do 92; that's a big part of how they get to be top-ranked contenders. And their winnings (% payoffs) per fight (+9.0%) are close to the matchmakers' estimates (+9.2%) of the bets by the crowd they would draw.

But maybe SPY is getting tired. His gate (+3.3%) is way under the +7.6% being anticipated. That's a weakness.

In evaluating the fighters' productivities, it's important to know how quickly each one has been able to achieve a KO or a TKO. The fewer rings (days) it takes, the better, from the point of view of the matchmakers and sponsors; the quicker they can get rich. SPY has taken 46 days typically, the challengers only 34. The ability to put a fighter in the ring more times a year makes a big difference in the business side of this brutal game. A 20% a year handle is better than historical averages by about double, but the contenders' average of +89% is about 4 ½ times the SPY alternative.

Let's look over the fight cards on each of these contenders:

The SPDR S&P Retail Index ETF (XRT) commands a following of $900 million, is up +35% ytd, and despite those gains still has an upside forecast 2.4 times the size of the kinds of trouble it has actually encountered. Coupled with a month-and-a-half turnover and win odds of nearly 9 out of 10 (89%), it has produced gains at an annual rate (46%) double that of SPY's +20% in about the same number of fights.

ProShares Ultra Pro QQQ (TQQQ) due to some exceptional strength training and body-building (all very legal) has 3x the strength of its cousin, described below. He has been carefully and less frequently matched, and is undefeated in his 34 prior bouts, all won by knockouts. The big expectations for TQQQ have been ably supported by his past performance, accomplished in so few rounds as to further magnify winnings to a triple-digit annual pace. His win record and payoffs have put his Range Index at the most favorable of any in the set, 22.

SPDR S&P Biotech Index ETF (XBI) has also been carefully matched, resulting in a win record second only to TQQQ. The smaller payoffs are strengthened by his quick footwork, making a return of nearly 4x that of SPY come from a current theme favorite.

iShares Russell 2000 small-cap ETF (IWM), a crowd favorite, it commands a follower group of $27 billion, trading 37 million shares a day. Winning 92% of its over 200 bouts is one reason for its popularity. The small-cap stocks held have long been an appealing theme with the investing public.

Powershares QQQ Trust (QQQ) track the Nasdaq Index NDX and have fed off that exchange's reputation of representing small, techy, fast-growing companies. Without the special constructs of its TQQQ cousin, the QQQ trades nearly 30 million shares a day.

Winning 7 out of every 8 bouts, this is one of the more conservative of the top-ranked contenders, but still producer more than 1 ½ times the rate of return of SPY.

Direxion Daily Semiconductor Bull 3x Shares (SOXL) is another of the structure-leveraged ETFs that have made a name for themselves. Its popular technological theme carries a strong past record of big payoffs but small trading volumes, which may help boost its strong price swings.

Well, the bell is about to ring for the first round. Get your bets placed.

Source: 6 ETFs That Can Beat SPY 4x Over, At Same Risk Ratio, Better Odds