ETF PowerRatings: Focus on Country, Index Funds for Short Term Trades
With the S&P 500 poised to complete a sixth consecutive day higher, it is little surprise that there are very few exchange-traded funds (ETFs) in the ETF market with high ETF PowerRatings of 8, 9 or 10.
Remember that our research into short term ETF behavior, going back to 2003 in the case of our ETF PowerRatings, reveals that ETFs that have the highest ETF PowerRatings of 8, 9 or 10 have advanced in the short-term nearly 80% of the time. This is why short term traders who rely on our ETF PowerRatings focus on those ETFs that have ETF PowerRatings of at least 8. This is where the historical edges – based on thousands of simulated ETF trades – are to be found.
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During times like these, when ETF markets are moving deeper and deeper into overbought extreme territory above the 200-day moving average, it can be good practice to review some of the fundamentals that are key to high probability trading with exchange-traded funds.
One of the foremost guidelines for short term ETF traders using high probability trading strategies like ETF PowerRatings is to focus on those ETFs that are based on the entire stock markets of countries – such as China (iShares FTSE/Xinhua China 25 ETF
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PowerRating)) or Russia (Market Vectors Russia ETF
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PowerRating), which includes stocks from countries like Mexico and Brazil.
Why do we emphasize these ETFs? In our testing, exchange-traded funds based on national stock markets – or groups of national stock markets – have moved back and forth between oversold and overbought conditions more reliably than other types of ETF that are based, for example, only on the stocks of a given sector (for example, the iShares Dow Jones U.S. Telecommunciations Index ETF
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PowerRating), which is incidentally one of the few ETFs in oversold territory as of Friday’s close).
Diversification is what helps country ETFs – including U.S. based indexes like the SDPR S&P 500 ETF
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PowerRating) – provide better, high probability trading opportunities compared to other types of funds. As is also the case with ETFs based on commodities, sector ETFs can become “trapped†in trends, making pullbacks under certain conditions either too shallow or too fleeting. The greater diversity among the equities of an entire country in a country or equity index ETF means that those ETFs are much more likely to recover after profit-taking sell-offs, reverting to the longer term mean and moving back and forth between overbought and oversold conditions in a more regular, predictable fashion.
To this end, our ETF PowerRatings includes ETF rosters that are broken down specifically by country and by equity index. This makes it all the more easy for ETF traders to focus in on the best of the best kinds of ETFs to trade every day.
Click here to start your free, 7-day trial to our ETF PowerRatings today!
David Penn is Editor in Chief at TradingMarkets.com.