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This is the first part of a three part series of articles about top down portfolio construction using relative momentum. Part two compares sector momentum and part three compares size and style momentum. The analysis is presented in a unique time series heat map visualization.

In 2010, the top five foreign ETFs had an average return of 43.9% and the bottom five had an average return of 3.9%. Thats a 40% difference between the top and bottom quintile. Keeping track of so many foreign ETFs can be a daunting task, but we have developed a visualization which provides a snapshot view of foreign ETFs' relative performance over time, making it easy to identify the best and worst performing foreign ETFs.

To visualize momentum, we created an equal weighted index of the top 20 foreign ETFs and measured each countrys performance against this index over a ten year period. For newer ETFs, data is provided for the time available.

The monthly returns of each country's ETF are compared to the monthly return of the index and classified into one of five stages of momentum. We used three moving averages to make the momentum determination; 1 month, 3 months and 10 months. Note that we are looking at monthly returns relative to the index - not absolute returns.

Momentum is classified on scale of 1 to 5 as follows:

Momentum of 1.0most bearish / negative momentum (dark red). The 1 month average is below the 3 month average, and the 3 month average is below the 10 month average.

Momentum of 5.0most bullish / positive momentum (dark green). The 1 month average is above the 3 month average, and the 3 month average is above the 10 month average.

The column on the left shows the momentum of the index itself. Countries are grouped together by region (Asia, Latin America, Europe, North America, and Other).

Notice how momentum, both positive and negative, generally lasts for multiple months and sometimes multiple years. The incidence of momentum changing course in a few months period is rare. Thus, there is a high probability that once a country starts to outperform, or underperform the index, it will do so for an extended period.

click to enlarge


  • Most of the Asian markets have entered a stage of underperformance, except for South Korea, which is still outperforming. Australia is in an early stage of outperforming.

  • In Latin America, Brazil and Chile are underperforming lately, while Mexico is showing continued strength.

  • Europe's underperformance has been broad based since the recession, except for Sweden and Turkey, but some countries have recently started to show strengthAustria, France, Germany, Italy, Netherlands and Poland. Belgium, Spain and Ireland are still lagging, but keep an eye on these countries as the best returns are generally had if you can catch the turnaround in the early stages.

  • Canada and the USA are both showing strength, but with some pullback months in between.

  • India, Israel and South Africa were all outperforming up until the end of 2010, and have entered a phase of underperformance since.

It looks like this might be the year for Western Europe to outperform. Keep an eye on how the chart develops each month so that hopefully you can pinpoint countries and regions as they cycle in and out of favor. Good luck.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.