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.
Note: A sort is only applied after the filtering has occurred.
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.
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.
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:
The triple momentum strategy performs well, beating the benchmark on both the cumulative return and on a risk-adjusted basis.
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!