Each month I update a momentum based ranking system of individual country ETFs. Historical studies have shown that momentum based strategies have performed well over time; thus, each month I put a variety of these strategies to the test on Scott’s Investments. Below is a table ranking a diverse list of individual country ETFs based on the average of their 3, 6, and 12 month returns. This list is tracked monthly on the right hand side of my blog Scott’s Investments.
This strategy is now tracked real-time as a hypothetical portfolio with a starting balance of $10,000 at the start of 2011. The advantage is to provide a more realistic portfolio experience. To view the returns and portfolio, simply click on “2011 International ETF” portfolio on the right hand side of Scott’s Investments. The new tracking system also provides a easy tracking of transactions. For May, we are performing the following trades:
Sell 51 shares of Market Vectors Russia ETF (NYSE:RSX)
Sell 63 shares of iShares MSCI Canada Index (NYSE:EWC)
Buy iShares MSCI Thailand Invest Mkt Index (NYSE:THD)
Buy iShares MSCI Germany Index (NYSE:EWG)
The pool of ETFs analyzed for this strategy has also been greatly expanded – we are now tracking an international basket of 15 fixed income and currency ETFs and 45 equity related ETFs.
There are several approaches one can take to momentum investing, such as those detailed here and here. However, for the purpose of this strategy we are hypothetically purchasing the top 4 ETFs as ranked by the average of 3, 6, and 12 month returns and which are also above their 200 day simple moving average. When the ETF is no longer in the top 6 at month end, it is sold and replaced with the next highest ETF.
The International ETF portfolio I began at the beginning of 2011 was unfortunately launched at the time money (and momentum) began shifting from emerging markets, which generally had a stellar run in 2010. Thus, returns for the first 4 months of the year have been disappointing. However, I will continue to track the strategy.
If you are worried about market drawdowns, two options to improve this strategy would be to use ETFReplay.com to screen for international ETFs that also have low volatility coupled with high momentum. Also, long positions in often volatile emerging markets could be coupled with a higher cash position or a position in an inverse, international focused ETF such as ProShares Short MSCI Emerging Markets (NYSE:EUM)
An additional concern when investing in international ETFs is the role of currency conversion in affecting returns. Movements in the US Dollar can impact the returns of these ETFs since funds need to be exchanged when purchasing securities abroad. There are some “dollar neutral” mutual funds and ETFs that attempt to invest internationally and hedge currency risk. However, with currency hedging an investor may also miss some of the benefit, or gains, of currency exposure. Nevertheless, investors should be aware of the impact (both positive and negative) exchange rates have on returns and that the option for hedging currency exposure exists. PowerShares DB US Dollar Index Bullish (NYSE:UUP) and PowerShares DB USD Bear ETF (NYSE:UDN) are two options for hedging positive or negative moves in the US Dollar.
Many of the strategies detailed here were inspired by Mebane Faber’s The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets
The data source for the information below is Finviz.
Written By Scott’s Investments No position disclosures
Scott’s Investments focuses on several different ETF portfolio strategies ranging from Basic, Individual, Country, US Sector, and Global Sector ETF portfolios.