In late 2009, ETF Database introduced the ETFdb 60 Index, an all-ETF composed of the largest ETF from each of our proprietary ETFdb Categories. Excluding leveraged and inverse funds, the index consists of 60 components funds spread across several different asset classes. The index is an equal-weighted benchmark, assigning an equivalent allocation to each holding upon annual rebalancing.
Since its introduction, the ETFdb 60 Index has become a go-to resource for countless investors, utilized as everything from a strict benchmark of financial market performance to an inspiration for trading ideas (see the index home page for a complete list of constituents and a more detailed description). Below, we highlight five of the most common uses of the index:
1. Identify The Day’s Biggest Winners And Losers
One of the most common uses for the ETFdb 60 Index is identifying asset classes on the move for any given day. Sorting component ETFs by “Change” orders the 60 funds by current day gain/loss, an easy way to see which asset classes and sectors are being affected the most by the day’s developments. The daily ETF roundup digs deeper into the day’s biggest winners and losers, uncovering the trends that sent these funds up or down on the day (sign up for the free ETF newsletter to get daily winners and losers delivered to your inbox).
Because the ETFdb 60 Index includes the largest fund in each category, share prices generally correspond very closely to the underlying values (meaning that a component ETF won’t experience a big movement as a result of a shift in a premium or discount).
The ETFdb 60 home page can also be used to quickly identify the asset classes that have seen the biggest gains and losses on the year by sorting the “YTD” column. Currently Latin American Equities (EWZ, down 10.7%) are down the most, while Japanese Equities (EWJ, up 3.7%) are the early leaders on the upside in 2010.
2. Measure The Performance Of Broad Financial Markets
Most investors rely on a handful of well known benchmarks–such as the S&P 500, Dow Jones Industrial Average, or NASDAQ–to gauge the direction of their portfolios. But these indexes only measure the performance of equity markets, giving no indication of how bonds, commodities, or other asset classes are performing. Most portfolios contain more than just stocks, so the S&P 500 generally won’t be a reliable indication of performance across all asset classes (particularly when correlations between stocks, bonds, and commodities is weak).
The ETFdb 60 Index is designed to track the performance of all asset classes available through exchange-traded funds, including equities, bonds, commodities, currencies, real estate, and exotic multi-asset class strategies. As shown below, the index’s base weighting provides a balanced view of the performance of broader financial markets. Moreover, because the components of the ETFdb 60 Index are equally weighted, it is unlikely that any single fund will distort the movement of the benchmark.
3. Benchmark Portfolio Return
The asset class allocation of the ETFdb 60 Index is roughly consistent with portfolio appropriate for investors with a moderate willingness and ability to take risks. As such, the index may be useful as a benchmark of portfolio performance for certain investors with an asset mix approximating the one shown above.
Investors who engage in some degree of active management can benchmark themselves against the ETFdb 60 Index throughout the year. Those able to consistently beat the benchmark may be adding value to their portfolio. But those who outperform the index half the time or less may be better suited for a lower turnover approach to investing.
4. Gauge Daily Trading Activity
Many investors focus only on the absolute change in market benchmarks without evaluating the level of daily trading volumes. On light trading days, bearish or bullish trends can often present an exaggerated picture of the day’s activity. By reviewing the aggregate volume for the ETFdb 60 Index on any given days, investors can quickly determine whether trading was light, heavy, or moderate.
Included in the daily ETF roundup (the graphic for January 26 is shown to the right) is the total daily trading volume for the ETFdb 60 Index component funds. So far in 2010, aggregate daily volumes have ranged from less than 600 million to more than 1.4 billion, with an average of about 800 million shares.
5. Measure Growth Of ETF Industry
There are many quantitative ways to measure the rapid rise of the ETF industry. Many look at the total number of ETFs and aggregate assets as the best indications of growth, but these figures have the potential to be pumped up if the industry reaches saturation. Because the ETFdb 60 Index includes the largest ETF in each of 60 categories, the size of index components can serve as a reliable barometer of ETF use as “core” portfolio holdings.
In our monthly newsletter, ETF Edge, we provide more in-depth coverage of the ETFdb 60 index, including aggregate market capitalization and year-to-date cash inflows for the component ETFs (if you’re not a subscriber to ETF Edge, which also includes ETF industry news and actionable investment ideas, sign up for a free trial or read more here).
Disclosure: No positions at time of writing.