Evaluating ETFs is not a trivial process. In many situations ETFs are used to populate specific asset classes, particularly sections of the market that are outside the expertise of ones stock picking abilities. ETF investors are not inclined to analyze a significant percentage of individual stocks held within the ETF and come up with an overall evaluation. Instead, they will buy an ETF to populate a particular sector or asset class and let it go at that. For example, if emerging markets is an asset class of interest one might choose either iShares MSCI Emerging Markets Index (EEM) or Vanguard MSCI Emerging Markets ETF (VWO) and not pay much attention to the exact holdings within the ETF.
Is there an alternative to evaluating ETFs other than digging deep into the fundamentals of the stocks held within the ETF? The following description is a model I use to sift through the maze of ETFs. As a starter, I stick with broad asset class ETFs available through Vanguard and iShares. I rarely stray far from these two firms looking for ETFs. My basic screen is the "Delta Factor," (DF) something I've hinted at in a number of articles. DF provides a probability tilt that the ETF will likely outperform a benchmark such as the S&P 500 over the next six to twelve months.
Once an ETF is identified by the Delta Factor model, DF becomes one of seven standards used to rank ETFs. Here are the seven technical indicators used in this process.
- The price of the ETF and its relationship with its 195-Day EMA is examined. We are looking for ETFs where the current price of the ETF is above its 195-Day Exponential Moving Average (EMA). This is a familiar metric as it is used in the ITARR model.
- The relative position between the 13-Day and 34-Day EMA is observed. It is a positive signal when the 13-Day EMA is above the 34-Day EMA.
- The numerical value for the Relative Strength Indicator (RSI) is the third indicator. 70% is the overbought region and 30% is the oversold boundary. Regardless of the numerical value, it is calculated and worked into an overall percentage linked to each ETF.
- The MACD indicator is the fourth technical indicator. Is the histogram positive or negative? We want the signal to be positive.
- What is the Morningstar rating? A five-star rating indicates the ETF is a good buy. Rankings run from one to five stars.
- The Delta Factor is the sixth metric.
- The Point and Figure (PNF) graph is the last metric and this graph is broken into four major configurations. Each of the four situations is quantized. For example, the most bullish condition for an ETF is when the slope of the line is negative but the right-hand column includes X's. I consider this to be a turn-around position for an ETF.
Each of the seven indicators is assigned a percentage so some metrics are more heavily weighted than others. A very strong buy signal will run as high as 180% while a strong sell signal yields a percentage as low as -90%. Right now, four ETFs indicate a Buy based on this combination of valuations. They are as follows.
- Vanguard MSCI Emerging Markets ETF (VWO) (128%)
- SPDR Dow Jones International Real Estate (RWX) (147%)
- iShares Dow Jones International Select Dividend Index (IDV) (147%)
- Vanguard Financial ETF (VFH) (148%)
While no ETF receives a "perfect" score, these four ETFs are all showing a probability tilt toward better than average performance over the next several months.
Disclaimer: Several of the seven metrics are projections into the future and therefore carry the inherent danger associated with any form of data extrapolation.