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As the market continues to roil and decline, which of the market sectors merit serious consideration if one populates a portfolio using ETFs. The following analysis uses five years of data, a projected return of the S&P 500 of 7.0% annual growth, and an inflation rate of 3.5%.

The following slide shows eleven sectors as identified by Vanguard and eight sectors represented by iShare ETFs. Five ETFs, VFH, VAW, VNQ, IYF, and IYM show the greatest probability of doing well over the next six to twelve months. Delta is the difference between the projected value and the historical value. The "Delta Factor" is a proprietary calculation that uses historical, future, and delta values as well as a projection for a broad market index such as Vanguard's Total Stock Market Index, VTSMX. Delta Factor is a reversion-to-the-mean calculation that is looking for clues as to which ETFs are most likely to outperform a broad market benchmarks such as the VTSMX or VFINX.

Financials, Basic Materials, and REITs are the three sectors that indicate the highest probability of doing well in the near future. Both Vanguard (NYSEARCA:VFH) and iShares (NYSEARCA:IYF) financials point in the same positive direction. The same is true for basic materials where VAW from Vanguard and IYM from iShares are both "Buy" based on this Delta Factor analysis. The third sector is VNQ from the stable of Vanguard ETFs.

(click to enlarge)

Based on historical observations, when the difference between the historical and future values are such that the Delta calculation is flashing a green signal as it is for the two financial ETFs, VFH and IYF, there is a high probability such ETFs will do well in the future.

Disclosure: I am long VNQ, VFH.

Disclaimer: As mentioned in prior articles with a Delta Factor focus, it is not unusual for the DF signal to come several weeks early. Each investor needs to do their own analysis.

Source: 3 Sectors Worth Considering