The IBD 100 is Essentially A Relative Strength Index

Jul 08, 2010 in Relative Strength


The Investors Business Daily (IBD) 100 is at its core a Relative Strength backtest of the IBD stock universe. Note that IBD's method is to also use its larger market BUY and SELL signals and these do not show up in the chart below.

If you use fixed-income ETFs in your screening/backtesting lists -- you effectively automate the 'Buy-Sell' signals by naturally rotating into the higher relative strength bond ETFs as stocks breakdown and bonds rally. We suggest using intermediate or short-term bond ETFs in your lists. Long-dated treasury ETFs can suffer from very high volatility -- and a key concept is to avoid highly volatile securities UNLESS they offer high expected returns. This is unlikely the case for most bond ETFs -- bond ETFs best attribute is their stability in times of turbulence.

Note also that while the IBD 100 is compared to the S&P 500 below, it does often own foreign stocks that trade on U.S. exchanges. While we cannot calculate the volatility of the IBD-100 since we don't have the data series, we suspect its volatility is far greater than the S&P 500. Remember that when volatility is HIGHER, you would EXPECT larger relative drawdowns.


This image captures the cumulative return of the IBD 100 index up through June 18, 2010 (note the massive drawdown in 2008).





Bond ETF Year To Date Total Return

Jun 22, 2010 in Total Return

True leadership in bond ETF segments continues as new 6-month highs today in a number of key bond indexes. You must understand total return in order to properly understand this as price charts through standard websites do not track the total return of the indexes. New 3 & 6-month highs among many major bond ETFs -- here are two:



ETFreplay continues to work hard on new functionality and will continue to release new products so check back in. In the meantime, we have listened to users requests and have made a number of enhancements such as:

* Much improved printing in the charts and tables (on ETF Charts, note the user 'control' at bottom of page -- a check box option -- to set up page for printing with white background - it prints quite nicely).

* The moving average backtest now has choice of either daily or monthly moving average.

* We have updated the video for the Relative Strength Backtest page


If you have any comments or requests, use the Contact Form to send us a message.


kind regards,




ETF rotation made easier to view and analyze with new ETF App

Jun 13, 2010 in Relative Strength | Video

ETF rotation is the focus of this video -  showing how our portfolio ranks summary 'app' Portfolio Screener Ranks-- can be used as an easy way to visualize leadership in custom ETF lists created by the user.

This video shows this new functionality by using recent news involving Bill Gross of Pimco and how relative strength LEADS the news.


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ETF Relative Strength Update:

Jun 04, 2010 in Relative Strength

US equities had led all asset classes for many months headed into late April. When global volatility picked up on the problems in Europe, this caused global equity correlations to rise. Since rising volatility is a negative contributor to expected equity returns, we forecasted a move down in the relative strength rankings for US equities relative to bonds and gold.

We highlighted a move to gold that triggered in our Relative Strength Application at the end of April. Gold has already shown its worth as gold had a positive return in May of +3% (+1100 basis points vs S&P 500) despite possible deflationary conditions in the Eurozone.

Our ETF Screener models tell us how money is flowing and US Treasury bond ETFs continue to lead the ETF relative strength rankings and are attractive on pullbacks. Because long-duration treasuries are quite volatile and don’t offer much yield, we prefer the 3-10 year treasury maturities. The chance of a large drawdown with an average duration in the 5-7 year range is quite low because of the very structure of intermediate bonds. We can look at history as a guide on this and see that while there were very large drawdowns in long-dated treasuries during the 2009 bond-market correction, the mid-term treasuries were significantly safer. So while a continued ‘flight-to-safety’ trade benefits long-duration treasuries most, we think investors should always consider risk in relation to return. And so for risk reasons, our preference is for intermediate treasury ETFs (for example IEI, IEF, BND).

This is a common situation ETF investors should get used to --- where you can like an area of the marketplace but choose to simply avoid the highest volatility ETF’s within that segment in order to control portfolio risk and target Sharpe Ratio (risk-adjusted returns).

Controlling drawdowns is a significant aspect to money management and is a primary reason we created ETFreplay. The very first application we built was a portfolio management module in order to help investors understand volatility and that implication for drawdowns. Remember this basic rule: the higher the volatility, the higher the drawdown.

On the negative side of the ETF Screener models, global forces have continued to aggressively sell equities. As seen below, the broad FTSE All-World Ex-US ETF (VEU) has so far experienced an -18.8% high to low drawdown over the last 6 weeks.



Summary: risk budgeting is a very important aspect to portfolio management . For sophisticated investors, discussing return without the context of risk is meaningless. Our backtest portfolio app allows users to simulate risk budgets by entering ETF weightings and viewing various market segments (as represented in ETFs) relative to some common major benchmarks, whose properties are well understood.



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Examining The Important Link Between Volatility and Drawdown

Jun 01, 2010 in Drawdown | Volatility

You hear the term ‘volatility’ thrown around a lot but it is really not well understood outside of the options market community.  Ask people outside the options community how to calculate volatility and they will likely stutter (including professional advisors).  

Using a chart in combination with volatility can visually show the important link between volatility and ‘drawdown.’  This chart looks at a simple comparison between the Barclays Aggregate Bond Index, the S&P 500 and the ProShares 2x Leveraged Long S&P 500 ETF.

ETF Charts

In this case, we know that the ProShares fund has exactly 2x the daily volatility of the S&P by design and so we expect it to have 2x the daily volatility, by definition (excluding tracking error and any expense ratio differences – which are usually trivial).    

But we would like to take this one step further -- as you observe various indexes, you can and should use the relative volatility of any ETF as a general guide to how much it may lose relative to the market in a correction.  It’s not that the precise historical volatility figure will predict the future volatility, it won’t.   But the historical volatility will offer a very good estimate of the RELATIVE size of a correction vs something like the S&P 500.

It’s a good rule to remember: the higher the volatility, the higher the drawdown.   If you buy and hold the most volatile ETFs, it’s just a matter of time before you will face a significant drawdown.   

Below is a chart that replaces the ProShares 2x ETF with an unlevered fund:  the very popular Brazil fund (EWZ).   

ETF Charts

Note the extremely high relative volatility --- and the larger drawdown.  If I graph volatility historically, you will see that in every observed instance, EWZ is materially more volatile than the S&P 500.   This does not by itself make EWZ unattractive – it depends on your return forecast for EWZ.   Should your return forecast for EWZ justify the increased volatility, then this is good news -- you would own it.

Summary:  the securities with the highest marginal contribution to portfolio risk should provide the highest expected returns.  This entirely logical concept tells the portfolio manager if their portfolio positioning is consistent with their own beliefs.



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Video Blog: Using and Understanding the Portfolio Relative Strength Application

May 27, 2010 in Backtest | Video

This video discusses some ideas related to our powerful new ETF Relative Strength Application. The key to understanding how it works is to understand its relationship with the ETF screener

Comments and feedback appreciated.

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Watch Global ETFs for Important Global Trends

May 24, 2010

The past few months (not just May) have been an example of why watching the entire globe, not just the United States, is important.  The convenient aspect to todays marketplace is that the ETF landscape makes this quite easy to do.  The stock market is just one slice of a global, multi-asset pie – spanning treasury bonds, real estate, corporate bonds, commodities, developed international markets, emerging markets  etc….  


ETF’s offer an opportunity for investors to benefit from volatility in ways that institutions cannot.   No large institution can rotate asset classes and global segments efficiently – it’s simply a matter of liquidity – they are too big relative to the trading volumes in the marketplace.   Nimble hedge funds and advisors as well as individual investors have a very significant advantage in gaining and reducing ‘exposure’ to various asset classes.  


As stated in our ‘ETF Overview’ page -- we believe investors should de-emphasize the micro issue of how to beat any particular market with stock-picking and instead focus their efforts on which MARKETS they would like exposure (long or short).   These asset class decisions are what drives your portfolio returns and while you can certainly buy individual stocks or mutual funds or individual bonds --- it STILL should matter to you what is going on in the broader investment landscape.


Pure momentum strategies have been shown to work over the long-run – but with significant drawdowns.   Our website is targeted at both finding relative strength AND building portfolios that limit drawdowns.  We offer a portfolio management page where you can compare the volatility of your portfolio vs that of the main benchmarks.  If your portfolio is more volatile than the global index then you should expect some very large drawdowns.   If you take time to understand the important link between volatility and drawdowns then you will be much better off.     



Backtest ETF Portfolio



Most investors were blindsided by focusing on the US economy and missed the larger issue of rising global volatility.   When volatility rises, correlations between markets rise --- this is a strong statistical tendency.  This is what happened to the U.S. stock market --- it would have been very odd if the global markets just continued to diverge amid rising volatility.

There will be a time to be more aggressive on global equities but there is no need to guess when – the relative strength models are sensitive to change and will show rising relative strength.  As we highlighted in prior posts, equity volatility is rising and the relative strength of equities is falling vs other asset classes. This is not a change -- it is just a continuation of a process that began months ago and   U.S. equities just finally joined in. 


We have suggested keeping portfolio volatility down – by staying away from global equities – and this situation will continue for a while as the models are unlikely to just reverse sharply back up after a strong rotation out.   If they do, we will have dry powder to join the big money forces that move assets classes into bull and bear phases.


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What are the differences between the Treasury Bond ETFs?

May 17, 2010 in Bonds

Richard Bernstein, the long-time market strategist from Merrill Lynch, has said many times that ‘U.S. Treasuries are the only true diversifying asset.’ We wanted to make a few more specific comments that add to the discussion with regard to US Treasury ETFs.

First, there is a very large difference between a short or intermediate 3-7 year type of treasury security and a 10-30 year long-term bond. The term ‘US Treasury’ is too vague to actually be practical. The short and long-term Treasury ETFs are really entirely different categories of securities.

The ETF world has securities all up and down the maturity spectrum. Let’s look at an extreme example to help understand what we are talking about: EDV (the Vanguard Extended Duration ETF) had a very large -41% high to low daily closing move (drawdown) in 2009. ‘Maximum drawdown’ is a nice, easy way to think about ‘risk’ --- everyone can understand it intuitively: When this asset class goes down, how much does XYZ go down vs others in the same asset class?

At the same time EDV was dropping -41%, the iShares 3-7 year Treasury bond ETFs largest drawdown was -6%. Maximum drawdown is the amount of loss if you bought the exact closing high and sold the subsequent exact closing low (the worst trade possible based on closing prices). While certainly far from perfect, this is a useful way for investors to at least incorporate some type of risk analysis into their thinking. Discussing returns without the context of risk is a common error made by investors across all segments of the industry.

As a general rule, you should avoid the highest volatility securities as these will tend to have the largest drawdowns -- and the ultimate goal is to think in terms of reward and risk – not just return.

Long-term bonds are quite tricky to analyze, given their low yields and highly volatile nature. Intermediate-term bonds (treasuries and non-treasury bond ETFs) are much more straightforward. If your timing is off, the penalty for this is much lower as this maturity zone won’t drop much when the equity markets are rising. But more importantly, this group will offer a nice hedge for nearly any other security you hold.

This table summarizes a list of U.S. Treasury ETFs and their Maximum drawdowns over the past few years:

Note: EDV had a very large capital gains distribution in 2009. Be aware that if you look at this on a regular charting platform that doesn’t adjust ETF for total return, the chart will not be representative of the underlying index that the ETF is tracking.

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Volatility Storms, Crises and ETF Correlation

May 16, 2010 in Correlation

First, a chart of GLD vs the FXE Euro Currency ETF is a simple yet powerful way to show the primary issue in the world right now:  

This EC (Euro currency) crisis has brought on a volatility storm (sharply rising volatility/VIX).   It is common to hear analysts and portfolio managers say --- what does a Greek default have to do with my US domestic small cap stock??   Well, a lot actually if the Greek problems lead to a crisis – as a crisis will cause overall market volatility to rise.

Correlations RISE in times of crisis.  This is not just a random statement, it can be viewed mathematically using the Capital Asset Pricing Model (CAPM) framework.

In CAPM, the correlation between two assets can be expressed as a function of their Betas and the variance of the market.  If we assume that both assets have a beta of 1.0 and identical residual risk, then it becomes mathematically true that correlations rise as variance rises.  Thus, some type of crisis causes overall variance to rise (in this case it’s the escalating debt problems in Europe)--- and then this rising variance will cause correlations to rise.  

Note the serious divergence of small cap US stocks and the MSCI ETF Europe (correlation at first drops on the lower chart) -- and then the subsequent increase in ETF correlation when VIX/volatility increased sharply.




see also:

Correlations Rise In Times of Crisis

for a more complete technical explanation of this topic see "Active Portfolio Management"  (Grinold & Kahn, 2000).  This book is extremely technical and really only for professional investors with mathematical orientation. 

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Vanguard Moves All-In

May 13, 2010

Recently, there has been a price-war in the ETF marketplace which is a very significant development. Schwab moved first, Fidelity raised Schwab -- and now Vanguard has pushed all-in. Neither Schwab nor Fidelity has been a strong player in the ETF market. But now industry heavyweight Vanguard has made each and every one of its 46 Vanguard ETFs free to trade --- assuming you have your account at Vanguard.

If this story sounds familiar, it's because the same thing happened many years ago in the mutual fund business. Prior to the 1970’s, banks and trust companies controlled most of the assets in the industry. Then the mutual fund became the product of choice and this was a multi-decade trend that led to an eventual $25 trillion mutual fund industry. Along the way, funds went ‘no-load’ – that is, no transaction fee. This was a very significant development as transaction costs like commissions and loads take money out of the investors pocket.

Today, we sit in the early innings of a major transition away from mutual funds and towards exchange traded funds. This current price war will serve to accelerate that transition.

Here is a breakdown of the ETF line-up at Vanguard. We do not view this as a complete list - as it fails to capture many of the interesting things that are likely to occur on a global scale over the next 10 years (long and short).   That said, Vanguard has recently launched fixed-income ETF’s so this at least begines to round-out a very heavy 'U.S. Equity' view of the world. We respect Vanguard as one of the most investor-friendly institutions in the world so we enthusiastically support this ETF list – but treat it for what is, a US dominated list.



We have also added a Vanguard list to the ETF screener  page:


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