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TPA’S ETF LABORATORY
Given the widespread use of ETFs, TPA has created a series of reports it calls the ETF Laboratory. The Laboratory examines ETFs from the perspective of trying to find extremes that could be turning points. The Laboratory reports point subscribers toward areas of the market which have potential upside and away from more vulnerable areas of the market. The reports only include liquid ETFs so clients can put their strategies to work and are sorted by how the categories are paired.
The ETF Laboratory will be published every 2 weeks and available to subscribers on TPA’s website.
The ETFs in the laboratory cover a wide swath of the global markets, including:
U.S. Broad (ex. large, mid, smallcap, growth, value…)
Clients can not only use the reports to buy and sell ETFs at turning points, the reports paint a vivid picture of widespread market trends and patterns so that clients can get ahead of changes. The ETF Laboratory also includes TPA’s brief synopsis [ETF Lab Results] to highlight critical investment themes.
ETFs UNDER A RELATIVE MICROSCOPE (1. Big Picture, 2. Testing Positive or Negative, 3. Drilling Down)
This is the most important Lab report. 86 liquid ETFs are each paired against each other over a 15-month period to find outliers. A pair is just the simplest way to simultaneously look at one part of the market versus another part of the market. Some ETF Lab users will want to establish long-short pairs, but the vast majority of clients will use ETFs Under a Microscope to find RELATIVELY more attractive areas in the market. Clients can use the pairs to determine optimal weightings for each category of the market.
METHOD: TPA uses performance of each part of the ETF pair versus the other to monitor for statistical extremes. Standard Deviations away from the mean are calculated and a percent move for the pair needed to get back to the 15 month average is calculated. This is the potential upside or downside. 86 ETFs paired would create 4045 pairs, but not all of these pairs make sense. The number of pairs has been reduced to 1306 “logical pairs”. Caveat - not all logical pairs will seem "logical" to all investors. Finally, TPA sorts the pairs by potential upside and highlights these extreme pairs in the report.
For the extremely inquisitive, TPA also provides a separate report that displays all 1306 logical pairs.
PERFORMANCE BY PERIOD
Look for ETFs that have significantly outperformed or underperformed in each timeframe. The timeframes are 1, 3, 6 months and 1, 2, 3, and 4 years. Depending on oversold or overbought conditions and how long they have been outliers, these ETFs may be at opportunistic levels. TPA has highlighted ETFs that rank in the bottom and top 10% of performance for each period.
CURRENT POSITION IN PERIOD RANGE
TPA calculates the low and high for each ETF over timeframes. The timeframes are 6 months and 1, 2, 3 and 4 years. The current level is then placed within the range in percentage terms. ETFs at the extreme lower part of the period range may present an opportunity to buy, while ETFs near the top of the range, may be vulnerable.