About UsCONTACT US
How to use sort criteria in ETF strategy building
Back to topic: Xplore ETFs - build your own ETF strategy

STRATxAI

February 2024 · 5 min read

How to use sorts in Xplore ETF

Beginner
Intermediate

In the previous post, we discussed the Xplore ETF filters and how they can be leveraged to customise a strategy.

In this post, we'll dig into the sorting methods provided by the Xplore tool.

Why is a sorting operation needed
  • A sort provides a way to order the ETFs by a particular metric.
  • Users can sort by up to 3 metrics at once.
  • Sorting is applied across each asset class that is selected in the universe parameter:
    • Stock Indices, Bonds, Inflation, Commodities, Value, Quality, Momentum, Dividend Yield, and Low Volatility
  • The top 1 ETF from each selected asset class is selected.
  • The portfolio size parameter indicates how many ETFs to use.

Note: A sort is only applied after the filtering has occurred.

  • Filtering based on metrics reduces the universe of ETFs down to only those that pass every filter. This means that on a given day your investment strategy will have a list of the ETFs that have passed all the filter criteria.
  • The sorting is then employed to order these ETFs so you can choose what ETFs go into your strategy. For example, choosing portfolio size of 3 means your strategy contains the top 3 ETFs, after the sort has been completed on your filtered ETFs
Using more than one sort?

When using more than one sort, we do not incorporate any ordering. Each factor generates its own individual ranking score for each ETF. We then calculate the final ranking-score for an ETF by summing up all of the individual rankings for that ETF. The sort is then applied to this final ETF ranking-score. These sort-scores are compared against all other ETFs in the asset class and the lowest score (i.e the top ranked, 1st position) from each selected asset class is taken.

In the below example, each ETF is sorted against all other ETFs in its asset class. In this case, we've chosen to build a portfolio based on 4 ETFs from the asset classes Market Indices and Momentum. Next, we calculate the momentum 3-month and volatility 3-month of each ETF in each asset class. We then rank these ETFs and give each one a score for each metric. Finally, we sum these scores and select the ETF from each asset class with the smallest final sort, which represents the top/best ranked. In the example, our portfolio will contain the ETFs, VTI and MUTM.

Momentum and volatility are popular sort metrics since they represent some of the most natural and important concepts in terms of investing. Sorting your final list would be a prudent thing to do, in order to ensure for example that the least volatile or the highest momentum ETFs are in your strategy, if that is what you want to focus on.

Putting the sorts into practice

With our Xplore ETF tool, you can start to build your knowledge and experience and start to experiment. Let's run through an example of using multiple sorts to create a strategy.

Xplore ETF sort on momentum

In the above example, we add 1 filter to ensure the RSI is in the bottom or best 40% (so as not to focus on over-bought ETFs) and we add 3 sort metrics:

  • Momentum 3-month
  • Momentum 6-month
  • Momentum 12-month

The triple momentum strategy performs well, beating the benchmark on both the cumulative return and on a risk-adjusted basis.

triple momentum strategy

Our Xplore tool is designed to be very dynamic and robust enough to investigate all sorts of investment strategy design decisions. Please let us know any feedback and enjoy building your own strategies!

PreviousNext

More in

Xplore ETFs - build your own ETF strategy

Announcing Xplore ETFs. Create, design, test and invest in your own strategies
Announcing the release of Xplore ETFs
February 02, 2023 · 2 min read