ETF PowerRatings: Strategies for Trading Countries in Bunches
Among the number of 9 and 10-rated exchange-traded funds (ETFs) on our radar today are a number of “area” or regional ETFs. These are ETFs that include not just the stocks of a single country, but of a number of countries in a given region such as the Pacific rim or Latin America.
For traders who use ETF PowerRatings to help guide their trading decisions, the availability of these regional funds provides another way to take advantage of the superior mean reversion tendencies we have uncovered in country ETFs. These mean reversion tendencies are what make country ETFs among the best to trade when using high probability trading strategies and setups such as PowerRatings.
Let’s take a step back for a moment. We looked at hundreds of ETFs – thousands of ETF trades since 2003 – and one of the things we discovered was that, in terms of relative performance, country funds tended to move back and forth between overbought and oversold levels better than most other ETFs. This tendency to revert to the mean is what makes country ETFs our top choice to include in our trading strategies when we are looking for trading opportunities on any given day.
One reason why this is so – and why equity indexes are also in this category – is because country ETFs tend to have a more diversified set of equity holdings compared to, for example, a sector ETF that has stocks that are all from the same industry. For example, if a given sector experiences strong selling, a sector fund linked to that industry will be affected far more significantly than a broad-based ETF – equity index or country ETF – that includes stocks from a variety of industry groups and sectors.
Area or regional ETFs offer this same diversification effect. For example, the iShares S&P Latin America 40 ETF
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Here are some of the regional or area exchange-traded funds with the highest ETF PowerRatings as of Tuesday’s open – in addition to the ILF noted above. All of these ETFs have ETF PowerRatings of 9. 9-rated ETFs have produced positive, short-term gains more than 77% of the time since 2003, according to our backtesting.
iShares MSCI BRIC Index Fund ETF
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BLDRS Emerging Market 50 ADR Index Fund ETF
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Claymore/BNY BRIC ETF
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iShares MSCI Emerging Markets Index Fund ETF
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Did you know that our PowerRatings work for exchange-traded funds too? If you’ve been looking for help in trading ETFs in both bull and bear markets, then our ETF PowerRatings may provide the solution you are looking for. Click here to start your free, 7-day trial today!
David Penn is Editor in Chief at TradingMarkets.com.