If you’re into ETFs, you obviously know all about the S&P 500 SPDR ETF (SPY), and the small-cap standard, the iShares Russell 2000 ETF (IWM). It’s also likely you’re aware of one or more ETFs labeled Value or Growth. But these are just drops in the bucket nowadays. Today, you can use ETFs not just to gain quick one-trade exposure to “the market,” but you can also use them for all sorts of interesting and exotic ideas that were once the sole province of individual stocks. So let’s take our stocks sense of adventure and see what we can uncover in the world of non-generic ETFs.
© Can Stock Photo / duiwoy55
For starters, I want to make it perfectly clear that I’m not at all down on big-name ETFs. But I’m already well positioned in those, and I’m happy with the “core” of my portfolio. Now, I’m looking mainly for some little “satellites.”
I’ll go into the Chaikin Analytics ETF screener and start with the basic “default” settings that appear when the tool is initially opened:
- US Equity ETFs
- All Groups
- All Subgroups
Then moving down to the Power Gauge Rating section (this addresses a proprietary Chaikin model that rates ETFs based on technical factors and the Power Gauge ratings for the stocks held in the ETF’s portfolio). Here are the choices I made:
- ETF Rating: Bullish
- Technical Rank: Very Bullish
- ETF Power Bar: (based on the ratio portfolio stocks that have Bullish ratings to those with Bearish ratings) :Bullish
This is important. I’m not just picking ETFs on the basis of which ones performed better over differing periods of time. I want to piggy-back atop the stock ratings, which are based on twenty factors distributed over four broad categories. This allows me to look for ETFs with portfolios that appeal based on something more than generic labels such as value, mid-cap, etc.
Now, in the Technicals portion of the screener, comes an oddball twist:
- Money Flow: Strong
- Rel. Strength: Weak
Even those who don’t know what money flow means will likely nod with acceptance at my choice here, doesn’t strong money flow sound like something that ought to be good if it’s applied to stocks or ETFs you own or want to own. In truth, it is a good thing. Chaikin Money Flow is a well established widely used technical indicator that combines price patterns and volume to, in common parlance, measure accumulation or distribution of a stock or ETF. To my more literal way of thinking, which notes that the amount of dollars sold and bought is always equal, I phrase this in terms of whether the buyer (the one who bids) or the seller (the one who asks) was more motivated to adjust in order to reach agreement on a price and get the trade executed. Now, since we all know that in this day and age, most trading is done by institutions, (entities cynics can deride all they want which in fact possess bona fide investment IQ and act knowingly and purposefully), we can say that this indicator gives us a window into the sentiment of “smart money.”
But what about that requirement of weak Relative Strength? Aren’t positive trends (a “bullish personality”) part of the core of our approach to analysis!
Yes, but nothing is unalterably carved in stone. My thinking here is that positive money flow into a heretofore lackluster stock or ETF, buying pressure with bidders more motivated than askers, is something that could help currently lackluster relative strength turn positive in the not-so-distant future.
This combination of weak relative strength and strong money flow is something of an oddball so there will be many occasions when I run the screen and find that it fails to uncover any ETFs. But when I do find something, its worth a look.
Finally, I decided to look for ideas off the beaten path and in the world of ETFs, that means staying small in terms of AUM (Assets Under Management). So I added one more screening rule.
- AUM: >= $300 mill. and < $2 bill.
I could have really gone full out here and sought ETFs with AUM below $300 mill. For what it’s worth, though, at the times when I ran the screen, no ETFs in the smallest AUM cohort made the cut. I’ll check again periodically in the future.
My First Crack At This Screen
When I first ran this screen back on October 2nd, I found three ideas:
- JPMorgan Diversified Return U.S. Equity ETF (JPUS):
This is an ETF that selects from the Russell 1000 universe, a large cap grouping, according to a V-Q-M (Value-Quality-Momentum) model. That, to me, is a spot-on combination given the Dividend-Discount-Model-based framework I use to assess stocks. Strictly speaking, its really Value-Quality-Growth but growth poses a challenge (the data we have relates to the past but investment looks to the future, which often differs from the past) so I tend to use informal proxies for expected growth and momentum is one of them (i.e. a stock that exhibits strong momentum probably does so because investors have favorable expectatios regarding future growth, and vice versa).
- FlexShares Quality Dividend Defensive Index Fund (QDEF)
First things first: Despite the database-yield of 6.05%, this is not an aggressive income play. The payout used in the calculation includes a capital gain distribution. Ex that, think in terms of a yield of around 2.5%, which is not too shabby and not surprising since expected dividend is among the investment criteria. Specifically, the model filters the universe (the Northern Trust 1250) based on expected dividend and company quality, and then weights stocks based on quality, dividend and beta with the latter targeted to the low-risk (relative to the market) 0.50-1.00 range.
- First Trust Financials AlphaDEX® Fund (FXO)
This ETF is a sector specialist — in Financials. Some automatically love this, some automatically hate it. Those who want to be genuinely diversified need it since it’s a sizable portion of pretty much all recognized benchmarks. And frankly, the stock and specialty ETF portions of my portfolio are lacking here so for me, this is a definite plus. And more exposure to a sector that stands to benefit if interest rates eventually rise (no matter how loudly Donald Trump screams at the Fed to cut rates, the reality is that there really is no more than trivial room for additional cuts) is not the worst thing I could pick up. Within Finance, this ETF sticks with Russell 1000 (large-cap) constituents, and uses the AlphaDEX model often seen in First Trust ETFs.
The process is a bit involved. It starts with computations of two scores; one for growth and one for value. Stocks classified by Russell (for purposes of their style-based indexes) are assigned the appropriate AlphaDEX Growth or Value score. Stocks deemed by Russell to be Growth-and-Value are given whichever AlphaDEX score, growth or value, is higher. So now, we have each Russell 1000 Financial stock with a single score based on its unique growth-value characteristics. These are sorted top to bottom and the lower 25% is eliminated. Then, the remaining stocks are assigned to five buckets (quintiles); the top (best) bucket gets the highest weight within the portfolio and so on down to the smallest weight for the fifth bucket. Stocks within each bucket are equally weighted. As noted, its a bit complicated but at the end of the day, I like the idea of the adaptability of the growth-value criterion. Better still, there is no single right answer to anything: Within the ETF’s portfolio the ratio of stocks with Bullish Chaikin PowerGauge ranks to bearish is a healthy 5.3, I love it when two completely different modeling approaches converge heavily on the same conclusions; let’s call it intellectual diversification.
Is A Screen Run A Few Weeks Ago Still Valid?
To tech-savvy 21st century users of mega-machines and high-frequency trading algorithms, a screen run 2 minutes ago might already be obsolete. But I’ve yet to see evidence that extreme speed produces better investment returns, as opposed to better profits for companies that sell machines and/or algorithms. In fact, in the nearly 40 years I’ve been an investment professional, I’ve been finding more success as I stretch time horizons from a month, to a quarter, and most recently to a year. Even though data is transmitted more quickly than ever, stories still take time to develop. This is especially so with ETFs that tend to be held longer and which often own stocks characterized by longer investment horizons,
The above ETFs performed reasonably since I first saw them on October 2nd and they pursue stable investing strategies that look like they may actually become even more viable as general economic and market uncertainty rises. And I put my money where my mouth is: I bought into all three of these ETFs today.
I ran the screen again yesterday and found another intriguing idea (which I also bought):
- Wisdom Tree US High Dividend ETF (DHS)
Basically, this is an equity income fund and its 3.36% yield puts it right into the mainstream of that niche. The uniqueness here is Wisdom Tree’s “smart beta” weighting protocol. Smart Beta is, nowadays, one of the most heavily overused and misused phrases out there. It refers to the process of weighting (allocating) portfolio positions based on one or more factors that do not depend on the price of the stock (that means market capitalization, the most popular weighting scheme, is very much out of the question). The idea, here, is to preserve the bigger-is-better approach but to define bigger in terms of company fundamentals. Wisdom Tree often uses dividend dollars paid as the criteria for weighting. That means companies that pay little or nothing in dividends are excluded or assigned tiny weights, no matter how much market capitalization they have. At first glance, this may seem like an exercise in mental gymnastics best left to academicians. Actually, though, the practical implications are large. Market cap weighting adds a lot more momentum to stock selection than many realize, which is great when markets are rising but which can be very painful if or when markets turn lower. For more on this, click here.