Volatility, ETF Ranking and Reversion to the Mean

Today with the market overbought and all our positions in the Daily Battle Plan Model Portfolio exiting profitably last night, I thought it would be a good time to look again at how ETFs have historically performed on a short-term, reversion to the mean basis. We’ll also apply this knowledge to stocks.

As I’ve written before, the ranking of ETF classifications is as follows.

Country Fund ETFs are best in my opinion. As we just saw in the successful trades in SPY and FXI, the drawdowns tend to be lower (countries don’t go out of business) and the historical predictability has been very high (about 85% correct applying a specific scaling-in strategy I teach known as TPS).

Sector Fund ETFs are next. They’re not as good as country funds as they’re more susceptible to corporate risk. But they also perform quite well on a historical basis using TPS.

Commodity, Currency and Bond Fund ETFs are the weakest of the three groups. Why? They’ll more often go on one-way moves and even though the % correct will be high, the losing trades can potentially be large. If you’re looking to lower the volatility of your portfolio, you should favor the Sector and especially the Country Fund ETFs.

This same philosophy applies to individual stocks. Tomorrow I’ll discuss this further here with you.

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Larry Connors is CEO and Founder of TradingMarkets.com and Connors Research.