Chapter 2: The Ten Factor System To Ranking ETFs
IN THIS LESSON
There are ten key factors that drive an ETF’s success.
Factor investing involves selecting securities based on specific attributes that are expected to drive performance. The ten key factors considered crucial for ETF success are:
Size (Assets Under Management): This measures the total market value of the assets an ETF manages. Larger funds often have better liquidity and lower bid-ask spreads. For the ETF Daddy Power Rankings, size is weighted at 5%.
Expenses (Expense Ratio): This represents the annual fee that all funds or ETFs charge their shareholders. Lower expense ratios are generally better, as they reduce the drag on performance. Expenses are weighted at 7.5%.
Liquidity: This refers to how easily an ETF can be bought or sold in the market. It includes primary market liquidity (creation/redemption processes) and secondary market liquidity (trading volume). Liquidity is weighted at 2.5%.
Risk (Beta): Beta measures the volatility of an ETF relative to the market. A lower beta indicates less volatility, making the ETF less risky. Risk is weighted at 10%.
Growth: Growth factors include metrics like earnings growth, sales growth, and asset growth. ETFs with high growth potential are often more attractive to investors looking for capital appreciation. Growth is weighted at 15%.
Value: Value metrics such as P/E, P/S, P/B, and P/CF ratios help identify undervalued ETFs that might offer higher returns. Value is weighted at 15%.
Momentum: Momentum considers the ETF’s recent performance and trends, with the idea that assets that have performed well will continue to do so. Momentum is weighted at 10%.
Sentiment: Sentiment indicators, such as earnings revisions and surprises, reflect market sentiment and investor expectations. Sentiment is weighted at 5%.
Quality: Quality factors include profitability metrics like ROE, ROA, and net margin, indicating the financial health and efficiency of the ETF’s underlying holdings. Quality is weighted at 20%.
Diversification: This measures how spread out the ETF’s investments are across different assets, sectors, and industries, reducing specific risk. Diversification is weighted at 10%.
The ETF Daddy Power Rankings System uses these factors with specific weightings to rank ETFs. Adjusting these weights can tailor the rankings to individual needs, reflecting personal investment goals and risk tolerance. This customization provides a framework for making objective, data-driven investment decisions.
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