Tuesday, December 4, 2012

It is going to be difficult for the  average performance of today’s top 25 ranked funds to beat the S&P 500, even the top 10 will be encumbered versus that benchmark.  The reason is because the three S&P 500 index funds all make the top 25 today with Vanguard’s VOO in 4th place.  The iShares (IVV) and SPDR (SPY) versions come in 8th and 12th place.  VOO gets the higher rank on a higher Fundamental Score but of course the fundamentals of all three are the same.  The reason is the Vanguard fund has only been around since late 2010 and Quant’s fundamental measures cover a longer time frame, in this case a time that included some better measures that make the others look not as cheap in the larger context.  So disregard VOO’s 85.7 Fundamental Score and assume it is more like the other two’s still strong 74.  On the behavioral side we see some similar quirks accounting for differences where we wouldn’t expect.  The two older funds get a Technical Score of 60.7 while the higher ranked VOO gets 61.8, historical context is the reason again so go with the lower scores that include Quant’s full time span.  All three have long term scores better than intermediate term and better still than the short term measures so a time out in the rally may be in order.  A shorter life is not the reason for VOO’s lower Sentiment Score of 60.7 which is more than 10 points lower than the other two.  Size is what matters here as the bigger funds have greater short interest and option activity making them easier subjects for bearish speculative trades.  Since all three do an excellent job of tracking the index, you shouldn’t expect a high put call ratio or short interest to boost performance of one versus the others.  All three funds get very high Quality Scores in the 90s with the older two getting a slight edge.  Summing it all up, if VOO had been around longer it would probably be ranking a few points lower, and the discrepancy between IVV and SPY is not as large as it looks as the former is in a 3 way tie for 8th place so only one fund separates them; that would be the iShares S&P 500 Value Index Fund (IVE) which we highlighted Friday.  It is rare for three funds to track the same index and it helps provide a good primer on how Quant works.  That said we have been hearing a clear message that the S&P 500 is a good place for your equity allocation over the next few months.  It may lead to today’s lists being among the few that do not beat that index but Quant says on average they will beat most other benchmarks over that time.  If you would like an in depth explanation of how Quant works, please let us know at support@etfg.com or call your sales rep.  We are here to help.

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