Consistency could legitimately refer to more than a half dozen investing concepts. What I mean is… which funds produced positive returns over the last 5 days as well as 1-, 3- and 6-month periods.
Granted, the first few days of February gave a quick boost to equities. Yet the last 3 trading sessions in January were exceptionally unfavorable. It follows that a 5-day gain shows near-term toughness.
Similarly, 1-month gains were extremely difficult to come by in the January selloff. For the contenders able to secure those gains, they are demonstrating short-term relative strength. And while 3-month and 6-month gains were easier to come by, investments that held firm across all of the aforementioned time periods have been “consistent.”
|5 of the Most Consistent ETF Performers |
(Gains Are Approximations)
|5 Days||1 month||3 months||6 months|
|iShares MSCI Turkey (NYSEARCA:TUR)||2.4%||2.5%||19.6%||21.8%|
|First Trust Amex Biotech (NYSEARCA:FBT)||2.3%||4.1%||17.6%||10.3%|
|Rydex Equal Weight Consmr Discret (NYSEARCA:RCD)||2.3%||0.4%||12.7%||19.5%|
|iShares Preferred Stock (NYSEARCA:PFF)||0.7%||2.0%||11.9%||7.2%|
|SPDR Russell Nomura Japan (NYSEARCA:JPP)||0.6%||0.8%||4.2%||0.6%|
One of the first things an observer may notice is that consistency over longer periods is not necessarily indicative of “knock-it-out-of-the-park-like” returns. Over 6 months, the S&P 500 accumulated about 10.3% the same amount as that of First Trust Biotech (FBT). Yet many other investments like MSCI Turkey (TUR) and Equal Weight Consumer Discretionary (RCD) were more powerful over 6 months.
Yet the near-term and/or shorter-term periods may be more telling. Whereas the S&P 500 has effectively traveled sideways across 5 days as well as lost 3% month-over-month, these particular ETFs had positive outcomes. What, if anything, do these consistent ETFs share in common?
I checked into volatility/risk scores at RiskGrades.com. However, the only ETF that was definitively less risky than the S&P 500 was the iShares Preferred Index Fund (PFF) and preferred stock is supposed to be less risky than common stock. Each of the other consistent performers were as volatile or significantly more volatile than the S&P 500 at RiskGrades.com. (Special Note: There are other ways to account for ETF Risk.)
If not volatility, what about the heart and soul of true diversification? Specifically, did these consistent performers have lower correlations to established benchmarks like the S&P 500 SPDR Trust (NYSEARCA:SPY)?
It turns out that they do! Whereas most stock ETFs have correlated very highly with the S&P 500 over 6 months with data typically above 0.94-0.99 for 4 of the 5 “consistent” ETFs had dramatically weaker relationships.
|Correlations To The S&P 500 SPDR Trust (SPY)||6-Month Correlation|
|iShares MSCI Turkey (TUR)||0.70|
|First Trust Amex Biotech (FBT)||0.55|
|Rydex Equal Weight Consmr Discret (RCD)||0.97|
|iShares Preferred Stock (PFF)||0.58|
|SPDR Russell Nomura Japan (JPP)||-0.10|
The potential lesson here? Smart portfolio construction is going to seek out investments that don’t have “green arrows” whenever the S&P 500 has “green arrows.” After all, when the S&P 500 is down, you’re going to want investments that sometimes go up.
Disclosure Statement: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The company does not receive compensation from any of the fund providers covered in this feature. Moreover, the commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.