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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 ETFs’ 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 Today’s most attractive ETF is the SPDR S&P Retail ETF (NYSEARCA: XRT ). The investment seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of an index derived from the retail segment of a U.S. total market composite index. In seeking to track the performance of the S&P Retail Select Industry Index (the “index”), the fund employs a sampling strategy. It generally invests substantially all, but at least 80%, of its total assets in the securities comprising the index. The index represents the retail industry group of the S&P Total Market Index (“S&P TMI”). The fund is non-diversified (Description from Yahoo Finance) 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 table 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 XRT apparently takes a low-concentration approach to holdings, with an average of 1¼% of its assets in each of its top ten commitments. This provides a wide dispersion of holdings among competitive investment contestants in an industry where success rewards can be huge, while failures may be complete. If the remaining 88% of assets are distributed on a comparable basis 99 separate bets may be being made, offering great diversification, as well as dilution of encountered bonanzas. Where ultimate payoffs are less dependent on initial capital commitment size, this may be an advantaged strategy. Figure 4 is a table of data lines similar to that contained in Figure 1, for each of the top ten holdings of XRT. Figure 4 (click to enlarge) In an industry as unpredictably dynamic as this, wide variations in market experience seem to be the rule. Column (5) contains the upside price change forecasts between current market prices and the upper limit of prices regarded by MMs as being worth paying for price change protection. The average of +10.2% of the top ten XRT holdings is near the population average of all 2600+ equities MM forecasts of +13.4%. It is about double the upside forecast for SPY price change prospects. The other side of the coin is column (6), which shows what actual worst-case price drawdowns have been typical in the 3 months following each time there has been a forecast like those of the present day. Those risk exposures have been about -7% in the holdings top ten, less than -9 by equities at large, and only -3.2% on the SPY ETF. But these holdings are attractive reward tradeoffs between returns and risks, with the top ten (column 14) at a ratio of 1.4, compared to equities overall at 1.6 times. The market average of SPY provides a ratio of 1.6 times risk avoidance. Another qualitative consideration is the credibility of the ten XRT big holdings after previous forecasts like today’s. The net average price change (column 13) of the ten has been only 0.5 times the size of the upside forecast average, +4.8% compared to +10.2%. The equity population’s actual price gain achievement, net of losses has been a pitiful +3.3% compared to promises of 13.4%. The ability of XRT holdings to recover from those worst-case drawdowns and achieve profits occurred in 75% of experiences. The equity population only recovered less than two thirds of the time, and while the SPY experiences were more consistent like the ten XRT holdings, the achieved gains were much smaller. SPY has had only +3.2% gains previously from like forecasts of +5.2%. The 20 top prospective equities from our overall equity population have superior credentials historically, given the past performance of present MM price range outlooks. Their reward-risk score of 1.8 is the highest of the four blue row averages. Their price recovery ability at 89% contributes mightily to their upside price forecast credibility and their % payoff achievement. Moving to targets more quickly than others has generated annual rates of gain (11) three times the XRT holdings and five times the rate of the population and market average. Conclusion XRT provides competitive forecast price gains in comparison to many other sector ETFs, supported by the outlooks for their largest holdings. Both the ETF and many of its major holdings offer strong prospects in near-term price behaviors, demonstrated by previous experiences following prior similar forecasts by market makers. In a market environment many consider to be at risk they present a reasonable defensive alternative. 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. Scalper1 News
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