A couple of months ago, I outlined a strategy for investing in country ETFs. It ranks stock markets of developed markets and a few major emerging markets by valuation and momentum.
Valuation is often one of the largest factors determining long term returns, while momentum has been more predictive of the short term. By combining both, we are trying to pick countries that have both long term and short term tailwinds.
We used median earnings yield and p/s to compare valuations.
Momentum was compared by calculating an exponentially weighted rate-of-change calculation on ETFs representing each country. While this is my preferred method, comparisons using the previous 12 or 6 month’s returns are very similar.
Over the last month this strategy has performed well with the top 5 countries returning 3.08% and the bottom 5 countries returning only 1.41%.
Methodology: First, the countries are sorted by each of the metrics individually (Valuation: median earnings yield and p/s; Momentum: the sum of the most recent 12, 6, and 3 month performance), assigning a score of 1 to the top country, 2 to the 2nd from the top, 3 to the third from the top, and so on. The scores of the underlying metrics are then added up, and re-sorted.
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