Several days ago, I published "Delta Factor" projections for a number of bond ETFs common to investors who use bond ETFs in their portfolios. Before discussing similar projections for international ETFs, allow me to digress and explain the general ideas behind the "Delta Factor."
At the heart of "Delta Factor" is a software program, Quantext Portfolio Planner (QPP), developed by Geoff Considine, and a program I use as an aid in building portfolios. Using historical performance data and future return projections from QPP, one captures a "feel" for current market conditions. Obviously, future projections expose one to all kinds of uncertainty and that needs to be taken into account in this type of analysis. With the uncertainty warning fresh in mind, what was the "Delta Factor" projecting in late March of 2009. In the following data table the projections were quite positive for a number of basic U.S Equity and international ETFs. The probability odds were pointing toward a much better future market. That projection turned out to be true. For additional explanation of the "Delta Factor" click on this link.
In the following table one finds a list of ETFs for a wide variety of countries ranging from developed to emerging markets. For example, we have Canada (NYSEARCA:EWC) and Germany (NYSEARCA:EWG) representing developed markets and Thailand (NYSEARCA:THD) as a developing or emerging market. In the list of countries, all ETFs but Indonesia (EIDO & IDX) have more than a three-year record, the minimum preferred when running this analysis.
Examining the following table, Switzerland (NYSEARCA:EWL) has a low probability of turning out as a good investment over the next six to twelve months. While this is certainly not an absolute certainty, the odds of finding success with EWL are not good. On the other hand, EWI, EWP, and EWQ have a much higher probability of serving the investor well over the near future. It comes as no surprise that those countries are Italy, Spain, and France respectively. All are beaten down due to the recent financial crisis. Armed with such a projection does not mean one marches out and buys these three ETFs. The underlying problems giving rise to these "Buy" signals remain in place. Just looking at the "Delta Factor" data, one would prefer to see more green in the Delta column as observed in the table above. In other words, the overall picture for international markets looks less than promising. While not shown in this article, there is a high correlation between most of the following ETFs. While pockets of opportunity show up from time to time, the current conditions on the international scene are not overwhelmingly positive.
The "Delta Factor" is programmed to show "Hold" in almost all market conditions to reduce the trading impulse. It is not unusual to see an ETF remain in the "Hold" mode for several years. Only extreme market conditions trigger the "Buy" or "Sell" projections.
In testing the "Delta Factor" over many different market cycles, I've found that the "Buy" signals tend to arrive early. Early can mean several months. Therefore, it does not make sense to take a full position in a particular ETF when the first "Buy" alert shows up. Nor should one sell off a position when the first "Sell" signal emerges.
For additional information and analysis on the "Delta Factor," search for the term on this blog site. Keep in mind that this probability analysis is built on the idea that investments will revert to the mean given sufficient time to operate.
Disclosure: I am long EIDO, IDX, EWJ.