Summary From a population of some 350 actively-traded, substantial, and growing ETFs this is a currently attractive addition to a portfolio whose principal objective is wealth accumulation by active investing. We daily evaluate future near-term price gain prospects for quality, market-seasoned ETFs, based on the expectations of market-makers [MMs], drawing on their insights from client order-flows. The analysis of our subject ETF’s price prospects is reinforced by parallel MM forecasts for each of the ETF’s ten largest holdings. Qualitative appraisals of the forecasts are derived from how well the MMs have foreseen subsequent price behaviors following prior forecasts similar to today’s. Size of prospective gains, odds of winning transactions, worst-case price drawdowns, and marketability measures are all taken into account. Today’s most attractive ETF Is the iShares US Financial Services ETF (NYSEARCA: IYG ) . The investment seeks to track the investment results of an index composed of U.S. equities in the financial services sector. The fund generally invests at least 90% of its assets in securities of the underlying index and in depositary receipts representing securities of the underlying index. It seeks to track the investment results of the Dow Jones U.S. Financial Services Index (the “underlying index”), which measures the performance of the financial services sector of the U.S. equity market. It is a subset of the Dow Jones U.S. Financials Index. The fund is non-diversified. (from Yahoo.Finance.ETF.Profile) The fund currently holds assets of $774 million and has had a YTD price return of +5.49%. Its average daily trading volume of 107,208 produces a complete asset turnover calculation in 75 days at its current price of $95.95. Behavioral analysis of market-maker hedging actions while providing market liquidity for volume block trades in the ETF by interested major investment funds has produced the recent past (6 month) daily history of implied price range forecasts pictured in Figure 1. Figure 1 (used with permission) The vertical lines of Figure 1 are a visual history of forward-looking expectations of coming prices for the subject ETF. They are NOT a backward-in-time look at actual daily price ranges, but the heavy dot in each range is the ending market quote of the day the forecast was made. What is important in the picture is the balance of upside prospects in comparison to downside concerns. That ratio is expressed in the Range Index [RI], whose number tells what percentage of the whole range lies below the then current price. Today’s Range Index is used to evaluate how well prior forecasts of similar RIs for this ETF have previously worked out. The size of that historic sample is given near the right-hand end of the data line below the picture. The current RI’s size in relation to all available RIs of the past 5 years is indicated in the small blue thumbnail distribution at the bottom of Figure 1. The first items in the data line are current information: The current high and low of the forecast range, and the percent change from the market quote to the top of the range, as a sell target. The Range Index is of the current forecast. Other items of data are all derived from the history of prior forecasts. They stem from applying a T ime- E fficient R isk M anagement D iscipline to hypothetical holdings initiated by the MM forecasts. That discipline requires a next-day closing price cost position be held no longer than 63 market days (3 months) unless first encountered by a market close equal to or above the sell target. The net payoffs are the cumulative average simple percent gains of all such forecast positions, including losses. Days held are average market rather than calendar days held in the sample positions. Drawdown exposure indicates the typical worst-case price experience during those holding periods. Win odds tells what percentage proportion of the sample recovered from the drawdowns to produce a gain. The cred(ibility) ratio compares the sell target prospect with the historic net payoff experiences. Figure 2 provides a longer-time perspective by drawing a once-a week look from the Figure 1 source forecasts, back over two years. Figure 2 (used with permission) What does this ETF hold, causing such price expectations? Figure 3 is a list of securities held by the subject ETF, indicating its concentration in the top ten largest holdings, and their percentage of the ETF’s total value. Figure 3 Source: Yahoo Finance IYG Concentrates 60% of its assets in its top ten commitments. This provides a responsive measure of the action of market prices of stocks in this essential sector. The major holdings are all established, dominant participants in the financial services industry. Figure 4 is a table of data lines similar to that contained in Figure 1, for each of the top ten holdings of IYG. For convenience, the IYG data itself is included. Figure 4 (click to enlarge) Column (5) contains the upside price change forecasts between current market prices (4) and the upper limit of prices (2), regarded by MMs as being worth paying for protection from adverse price change. The average of +7.2% of the top ten IYG holdings is well above the market-average proxy of SPY of +5.3%. Diversification of IYG’s other 40% of holdings damps its overall upside (as MMs see it) to only +4.4%. But in the same stroke the risk side of the equation in (6) for IYG is brought down to worst-case price drawdowns of -2.8%, below the defensive market-tracking ETF SPY norm of -3.2%. In an environment many consider imbued with high market risk, IYG may provide a very attractive balance. The ability of IYG holdings to recover from those worst-case drawdowns and achieve profits (8) occurred in 93% of experiences. The equity population only recovered less than two thirds of the time, and while the SPY experiences were more consistent, the achieved gains were much smaller. SPY has had only +3.5% gains previously from like forecasts of +5.3%. Another qualitative consideration is the credibility of IYG after previous forecasts like today’s. Its net average price change gain (column 9) has been 1.1 times the size of the upside forecast average, +4.8% compared to +4.4%. The equity population’s actual price gain achievement, net of losses has been a pitiful +3.2% compared to promises of 13.5%. Conclusion IYG provides attractive forecast price gains, supported by its equally appealing largest holdings. Both the ETF and many of its major holdings offer very attractive prospects in near-term price behaviors, demonstrated by previous experiences following prior similar forecasts by market makers. But it may be considered a defensive commitment in the face of widespread anticipation of further market weakness. A more constructive strategy would be to seek out individual stock opportunities offering odds-on achievement of low double-digit price gains where past similar forecasts encountered only small worst-case price drawdowns during their relatively short holding periods en route to sell targets. The blue summary row of Figure 3 labeled “20 best odds forecasts” tells what the current top-ranked wealth-building opportunities are offering, as a comparative competitive norm. YTD in 2015, 2062 of these 20-a-day list members have reached closeouts in an average of 2-month holding periods, providing a +30% annual rate of average price-change gains. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
