Tuesday, September 6, 2016

Emerging Markets Leaders & Followers

What’s your plan for tomorrow, Are you a leader or will you follow” - The Interrupters

During one of my many trips in the car over this holiday weekend, I came across “Take Back the Power” by The Interrupters while flipping through the stations on Sirius XM.  As the song played, the lyrics got me thinking about a few things, one in particular is how true that is in the financial markets. Most strategies used today can be grouped into mean reversion or trend following. While the definitions and inputs may vary, the theory is the same.

By sorting the ETF Global® Quant model by any of the individual factor scores, it’s easy to see who the leaders and followers are in the ETP world.  If you click twice on the “LT” header under Technical, the column sorts by the Long-Term technical factor with the highest scoring products at the top. This factor is heavily influenced by long-term momentum, which is used in a lot of trend following strategies.

There are a lot of different products in the top 10 or so products such as PureFunds ISE Big Data ETF (BIGD) and the First Trust Indxx Global Agriculture ETF (FTAG), but it’s easy to see a trend emerge among some of the top scoring products as many focus on Emerging Markets. The JPMorgan Diversified Return EM ETF (JPEM), EGShares EM Core ex-China (XCEM) and ironically the PowerShares S&P EM Momentum (EEMO) all have very high momentum scores.  Given the climb by Emerging Markets during this year, this shouldn’t be a surprise to anyone.

If you click on the “LT” header again, the list is now sorted in ascending order. By looking at both the Long-Term (LT) score and the Short-Term (ST) score, you can see which products have potentially turned the corner after having a bad run. The key is to find products that have low long-term scores with high short-term scores.

The raw list is an eclectic group but by focusing on those that have a short-term score above 50 you will see that there are a number of hedged products in the group including the WisdomTree Korea Hedged Equity (DXKW), Deutsche X-Trackers MSCI United Kingdom Hedged Equity (DBUK) and Deutsche X-Trackers MSCI Brazil Hedged Equity (DBBR) ETFs.  Are these the new Leaders of tomorrow or are they just getting whipped around by currency markets over the comments out of the FED recently?  Only time will tell but they may have taken the first steps needed to walk that path.

We hope that everyone enjoyed their long Holiday weekend and thank you for reading ETF Global Perspectives!

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