Commodity ETF Momentum and Roll Yield Rankings

Momentum and roll yield are two of the most commonly discussed strategies relating to commodity future investing. These two factors are the two factors that determine commodity selection in the Summerhaven Dynamic Commodity Index, the underlying index for the United States Commodity Index Fund (USCI). The Summerhaven Dynamic Commodity Index holds the seven commodities with the highest roll yield, and the seven commodities not already selected with the highest 12 month price change. This is a bit closer to the screening approach, than the ratings or “one number” approach that I prefer, so I thought I would combine the rankings of the two indicators for commodity ETFs and ETNs.

Notes:

• I used the performance of the ETFs or ETNs to measure momentum. This can be quite different from the price performance of the actual commodity due to the effect of the roll yield.
• To measure momentum for Corn, Platinum, and Palladium where the ETFs haven’t existed for a year, I used the Dow Jones-UBS Corn TR index, the platinum spot price, and the palladium spot price.
• I added in the iPath Grains ETN (JJG) and the iPath Livestock ETN (COW) because the majority of the commodities held in those sectors are not available in ETP form.
• The total ranking is a ranking of the sum of the momentum and roll yield rankings.

Strategy Weekly – December 19

This is a summary of several strategies available on vectorgrader.com for those who just visit the blog or who prefer receiving an email.

Market Model

This week, our market model dropped its exposure about 15% to 83.55%, marking the most significant position below 100% in a few months. Last week the exposure was reduced below 100%, but only by a smidgen. This change is largely a result of the interest rate’s signal change from partially positive to negative. Ten year treasury rates have been rising quickly causing the trend indicators to change.

Market Rotation / TAA

Small Cap Stocks	iShares Russell 2000 Index Fund	IWM	1
Emerging Markets	Vanguard Emerging Mkts ETF	VWO	2
Commodities	PowerShares DB Commodity Index Fund	DBC	3
Gold	iShares Gold Trust	IAU	4
Large Cap Stocks	iShares S&P 500 Index Fund	IVV	5
Real Estate	iShares Cohen & Steers Realty Majors Index Fund	ICF	6
International Stocks	iShares MSCI EAFE Index Fund	EFA	7
Short Term Treasuries	iShares Barclays 1-3 Year Treasury Bond Fund	SHY	8
Long Term Treasuries	iShares Barclays 20+ Year Treasury Bond Fund	TLT	9

Minor Markets

Small Cap U.S. Stocks	iShares Russell 2000 Index Fund	IWM	1
Precious Metals	PowerShares DB Precious Metals Fund	DBP	2
Agriculture	PowerShares DB Agriculture Fund	DBA	3
Asia	iShares S&P Asia 50 Index Fund	AIA	4
Africa	Market Vectors Africa Index ETF	AFK	5
Middle East	Market Vectors Gulf States Index ETF	MES	6
International Small Cap	iShares MSCI EAFE Small Cap Index Fund	SCZ	7
Emerging Markets Small Cap	SPDR S&P Emerging Markets Small Cap ETF	EWX	8
Base Metals	PowerShares DB Base Metals Fund	DBB	9
Australia	iShares MSCI Australia Index Fund	EWA	10
Latin America	iShares S&P Latin America 40 Index Fund	ILF	11
Canada	iShares MSCI Canada Index Fund	EWC	12
Large Cap U.S. Stocks	iShares S&P 500 Index Fund	IVV	13
Real Estate	iShares Cohen & Steers Realty Majors Index Fund	ICF	14
Japan	iShares MSCI Japan Index Fund	EWJ	15
Japan Small Cap	SPDR Russell/Nomura Small Cap Japan ETF	JSC	16
Europe	Vanguard European ETF	VGK	17
High Yield Bonds	SPDR Barclays Capital High Yield Bond ETF	JNK	18
Energy	PowerShares DB Energy Fund	DBE	19
Emerging Market Debt	iShares JPMorgan USD Emerging Markets Bond Fund	EMB	20
International Treasury Bonds	SPDR Barclays Capital International Treasury Bond ETF	BWX	21
Short Term Corporate Bonds	iShares Barclays 1-3 Year Credit Bond Fund	CSJ	22
Short Term Treasuries	iShares Barclays 1-3 Year Treasury Bond Fund	SHY	23
Long Term Treasuries	iShares Barclays 20+ Year Treasury Bond Fund	TLT	24

Sector Rotation

Materials	Vanguard Materials ETF	VAW	1
Consumer Discretionary	Vanguard Consumer Discret ETF	VCR	2
Energy	Vanguard Energy ETF	VDE	3
Industrials	Vanguard Industrials ETF	VIS	4
Telecommunications	Vanguard Telecommun Serv ETF	VOX	5
Information Technology	Vanguard Information Tech ETF	VGT	6
Consumer Staples	Vanguard Consumer Staples ETF	VDC	7
Financials	Vanguard Financials ETF	VFH	8
Health Care	Vanguard Health Care ETF	VHT	9
Utilities	Vanguard Utilities ETF	VPU	10

Bond Rotation

High Yield Bonds	SPDR Barclays Capital High Yield Bond ETF	JNK	1
Emerging Market Bonds	iShares JPMorgan USD Emerging Markets Bond Fund	EMB	2
International Government Bonds	SPDR Barclays Capital International Treasury Bond ETF	BWX	3
Treasury Notes	iShares Barclays 7-10 Year Treasury Bond Fund	IEF	4
Short Term Corporate Bonds	iShares Barclays 1-3 Year Credit Bond Fund	CSJ	5
Short Term Treasuries	iShares Barclays 1-3 Year Treasury Bond Fund	SHY	6

Currency Rotation

Currency	Similar ETF	ETF Ticker	Total Rank	Interest Rate Rank	Valuation Rank	Momentum Rank
Australian Dollar	CurrencyShares Australian Dollar Trust	FXA	1	1	8	1
New Zealand Dollar	WisdomTree Dreyfus New Zealand Dollar	BNZ	2	2	4	5
Swedish Krona	CurrencyShares Swedish Krona Trust	FXS	3	3	7	3
Canadian Dollar	CurrencyShares Canadian Dollar Trust	FXC	4.5	4.5	5	6
United States Dollar	iShares Barclays Short Treasury Bond	SHV	4.5	7.5	1	7
British Pound	CurrencyShares British Pound Sterling Tr	FXB	6	6	2	8
Euro	CurrencyShares Euro Trust	FXE	7	4.5	3	9
Swiss Franc	CurrencyShares Swiss Franc Trust	FXF	8	7.5	9	2
Japanese Yen	CurrencyShares Japanese Yen Trust	FXY	9	9	6	4

Sector Valuation and Momentum Rankings

Valuation is one of the largest factors determining long term returns. Momentum, on the other hand, has been more predictive in the intermediate term. By combining both, we are trying to pick sectors that have both long term and intermediate term tailwinds.

To measure valuations of each sector, I used the median P/E, Earnings Yield, P/S, P/B and PEG ratio. This method is not perfect as some sectors’ valuation metrics tend to revert to different levels. It can, at least, give us something of an idea about where valuations are. First, the sectors were sorted by each of the metrics and given a score based on their position. The scores of each metric were then added up and this result was ranked relative to the other sectors’ score.

For comparing momentum, I used the sum of the price performance over the last 13, 26, and 52 weeks of both the market cap weighted index and the equal weighted index for each sector.

For more ETF ideas, check out our ETF ratings.
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