Thursday, February 14, 2013

Shakespeare lamented blind love being so often beguiled in its choice; fortunately Quant is not monogamous and shoots plenty of its golden arrows everyday to varied targets.  Lately those arrows have been directed towards US large cap funds and the Grande Dame of that group is the oldest ETF on the market celebrating its 20th birthday last month, the SPDR S&P 500 Fund (SPY).  It garnered most of Quant’s affection over this midwinter night ranking in 1st place, but Quant’s wandering eye is also focused on some of its pretty sisters.  The iShares S&P 500 Index Fund (IVV) gets enough love to rank in 7th place and also close behind is Vanguard’s S&P 500 ETF (VOO) in 11th place today.

Does this mean that SPY will outperform IVV and VOO in coming months?  Probably not.  All three get excellent mid 90s Quality Scores where minor differences can be attributed to liquidity and sponsor size.  Likewise all three have identical constituents and get a Global Theme score right around 65, very minor differences here can be attributable to minor differences in constituent weights which should not affect performance over time.  When we psychoanalyze Quant’s affection, the Behavioral and Fundamental Scores are where we really get inside its mind.  On the technical side of Behavioral, all three score about 74 where small differences can result from one or another closing on a bid or an offer.  Bigger differences emerge on the sentiment side where SPY scores 68.2 to VOO’s 60.6 and IVV’s 54.2.  All three get high short interest and low implied volatility scores but varied put/call scores.  SPY wins that one at 81.3 as option traders tend to choose the more liquid name.  Over on the Fundamental side we see more differences despite identical holdings.  Age is beauty here as the older funds score better.  The algorithm does not just look at current valuation but puts it in a historical context and VOO’s youthful two years only includes post crash valuations making it look more expensive.

So which one should earn your affection?  It doesn't really matter as all three do an excellent job tracking the index.  Any bump that SPY gets from those puts being covered will be offset by that tight tracking.  Maybe your broker has better commission rates with one or another or maybe you already have affection for one of those sponsors.  All are deserving of that affection exemplified by those high Quality Scores.  So this is one of those rare investment decisions that can be made with your heart as much as your head.  Winged Cupid is painted blind but like Shakespeare’s fairies, Quant will bless your portfolio so you ever shall be fortunate.  Thank you for reading and happy Valentine’s Day (don’t forget the flowers tonight!)

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