We’ve been asked a few times to give a better description of how our ETF trading systems are constructed. The short answer is that we developed a system for ranking ETFs based on intermediate term performance with extra credit given for very recent short term weakness.

In other words, most of the ETF trading systems (that is, most of the weekly systems), simply take the universe of ETFs that we track and rank them based on the medium term performance (around 6-months to a year) and add to that ranking of the medium term performance is a bonus factor for recent (around one or two weeks) poor performance. The best ranked ETF (or ETFs if the system holds more than one at a time) is then chosen to trade into.

So, the philosophy behind the approach is that ETFs that have been performing well for 6 months to a year will continue to perform well – and credit is given to an ETF that has performed well but has run into a period of (very) short term weakness – with the idea being that the longer term performance trend will likely resume – and the short term weakness should provide the perfect time to get in on the trend.

Of course, most of the systems add a sort of safety valve – moving to a bond fund if equity funds in general are performing extremely poorly – better to ride out the extreme downtrends in a position that is out of the market than to try to guess a bottom or to try to pick the best of a bad lot.