Megaphone icon ETF Database is now VettaFi. Read More >
ETFdb Logo
ETFdb Logo
  • ETF Database
  • Channels
    • Active ETF
    • Alternatives
    • Beyond Basic Beta
    • China Insights
    • Climate Insights
    • Commodities
    • Core Strategies
    • Crypto
    • Disruptive Technology
    • Dividend
    • Dual Impact
    • Emerging Markets
    • Energy Infrastructure
    • ESG
    • ETF Building Blocks
    • ETF Education
    • ETF Strategist
    • Fixed Income
    • Free Cash Flow
    • Future ETFs
    • Gold & Silver Investing
    • Innovative ETFs
    • Institutional Income Strategies
    • Leveraged & Inverse
    • Managed Futures
    • Modern Alpha
    • Multi-Asset
    • Portfolio Strategies
    • Retirement Income
    • Thematic Investing
    • Volatility Resource
  • Tools
    • ETF Screener
    • ETF Country Exposure Tool
    • ETF Sector Tracker Tool
    • ETF Database Categories
    • Head-To-Head ETF Comparison Tool
    • ETF Stock Exposure Tool
    • ETF Issuer Fund Flows
    • Indexes
    • Mutual Fund To ETF Converter
    • ETF Data for Journalists
    • ETF Nerds
  • Research
    • First Bitcoin ETF
    • ETF Education
    • Equity Investing
    • Dividend ETFs
    • Leveraged ETFs
    • Inverse ETFs
    • Top ETF Sectors
    • Top ETF Issuers
    • Top ETF Industries
  • Webcasts
  • Themes
    • AI ETFs
    • Blockchain ETFs
    • See all Thematic Investing ETF themes
    • ESG Investing
    • Marijuana ETFs
  • Videos & Podcasts
    • ETF 360 Video Series
    • ETF Trends on Videos
    • ETF Trends on Podcasts
    • ETF Prime Podcast
  • PRO
    • Pro Content
    • Pro Tools
    • Advanced
    • FAQ
    • Pricing
    • Free Sign Up
    • Login
  1. ETF Investing
  2. Relative Strength Investing 101
ETF Investing
Share

Relative Strength Investing 101

Stoyan BojinovJul 26, 2016
2016-07-26

Momentum investors will often look to Relative Strength for clues to help with security selection. This article will explore the topic in greater detail, pointing out some misconceptions as well as applications.

What is Relative Strength?

Relative Strength (RS) is the measure of how strong a security’s price trend is compared to that of another security. In most cases, RS is used to gauge which securities are the strongest (or the weakest) compared to the overall market, with the S&P 500 being a favorite reference point for many.

For example, a stock or ETF which is greatly outperforming the S&P 500 would be said to have high RS, whereas any security that happens to be greatly underperforming the broad market would be deemed to have low RS.

At its core, Relative Strength falls under the momentum investing discipline. This means that Relative Strength seekers aim to ­buy high and sell higher.

Read more about Momentum Investing.


Content continues below advertisement

What Relative Strength is Not

Relative Strength should not be confused with the Relative Strength Index (RSI). The latter is a technical momentum indicator, or more specifically an oscillator, which compares recent gains versus recent losses in an effort to determine oversold and overbought conditions. RS, on the other hand, is only concerned with gains and losses compared to the market and not to the individual security’s price history like the RSI.

The Basics behind a Relative Strength Strategy

There are a multitude of ways to utilize RS when assembling a strategy, but the basics boil down to using this measure to start your security selection process.

Here is an example of how you might use this type of analysis:

  • Suppose you want to put capital to work. Wait for a pullback in the broad market. There is no concrete definition of what that means quantitatively, but a sell-off of more than 2% and less than 10% is generally a good range for the S&P 500.
  • During the pullback observe which securities are not falling as much as the major average, or better yet are rising. These securities – the ones with high RS – are likely to outperform once the averages settle down and bullish momentum returns to the broad market.
  • This list of securities can be used in many ways. For example, if you notice a lot of biotech stocks rallying in the face of a sell-off, you could play the expected continuation of this trend with an industry ETF to avoid the troubles (and the risk) of choosing a single biotech stock.

Learn more about simple momentum trading strategies.

Consider the following resources for RS metrics:

  • ETF Screen
  • ETF Replay

Risks to Relative Strength

No trend lasts forever

Perhaps the biggest risk to relying on RS measures is the outright risk of an unexpected trend reversal. There is always the potential for an exogenous factor or surprise event of some sort to completely change the direction of price trends already in place.

RS can be Misleading

If a “regular” market pullback turns into a full-blown correction, or even worse a bear market, then even those securities with the highest RS measures are vulnerable to swift profit-taking pressures. Just like a rising tide is said to lift all boats, a bear market can (and will sooner or later) bring down even “best of breed” names.

Ways to Play

Aside from implementing your own RS strategy, there are a number of ways to tap into this investment approach via ETFs. Currently, there are two issuers that have funds focused exclusively around RS-themed methodologies: PowerShares and FirstTrust.

Some of the most well-known ETFs based on the principles of RS include the PowerShares DWA Momentum Portfolio ETF (PDP) and First Trust’s Dorsey Wright Focus 5 ETF (FV).

The Bottom Line

Relative Strength can be a very insightful metric when it comes to security selection, and especially so after a market-wide pullback as discussed in the strategy section above. As with any other investment strategy however, it is paramount to really research it in-depth so you may uncover its nuances and drawbacks to better determine if it is right for you.
Follow me @SBojinov

» Popular Pages

  • Tickers
  • Articles

Aug 16

A Diversification Strategy to EV Investing

Aug 16

What Europe’s Energy Crisis Means for Carbon Markets

Aug 16

Headlines Could Use a Warning Label!

Aug 16

ETF Prime: Lara Crigger on Clean Energy and ESG

Aug 16

Morgan Stanley ETFs Are Arriving

Aug 16

A Fireside Chat With EPD: Managed for Long-Term Success

Aug 16

Check Out RHS for Walmart Exposure

Aug 16

New ConvexityShares ETFs Offer Exposure to SPIKES

Aug 16

Demand for High Yield Bond Funds Went Up During July

Aug 16

OpenAI’s DALL·E 2 Model Has Profound Implications

QQQ

Invesco QQQ Trust

VOO

Vanguard S&P 500 ETF

SPY

SPDR S&P 500 ETF Trust

VTI

Vanguard Total Stock Market...

SCHD

Schwab US Dividend Equity ETF...

VNQ

Vanguard Real Estate ETF

ICLN

iShares Global Clean Energy...

XLK

Technology Select Sector SPDR...

ARKK

ARK Innovation ETF

VYM

Vanguard High Dividend Yield...

Loading Articles...
Help & Info
  • Contact Us
  • Mission Statement
  • Press
Tools
  • ETF Screener
  • ETF Analyzer
  • Mutual Fund to ETF Converter
  • Head-To-Head ETF Comparison
  • ETF Country Exposure Tool
  • ETF Stock Exposure Tool
  • ETF Performance Visualizer
  • ETF Database Model Portfolios
  • ETF Database Realtime Ratings
  • ETF Database Pro
More Tools
  • ETF Launch Center
  • Financial Advisor & RIA Center
  • ETF Database RSS Feed
Explore ETFs
  • ETF News
  • ETF Picks of the Month
  • ETF Category Reports
  • Premium Articles
  • Alphabetical Listing of ETFs
  • Best ETFs
  • Browse ETFs by ETF Database Category
  • Browse ETFs by Index
  • Browse ETFs by Issuer
  • Compare ETFs
Legal
  • Terms of Use and Privacy Policy
  • © ETF Flows LLC
Follow ETF Database
Follow ETF Database

Advertisement

Is Your Portfolio Positioned With Enough Global Exposure?

ETF Education Channel

How to Allocate Commodities in Portfolios

Tom LydonApr 26, 2022
2022-04-26

A long-running debate in asset allocation circles is how much of a portfolio an investor should...

Core Strategies Channel

Why ETFs Experience Limit Up/Down Protections

Karrie GordonMay 13, 2022
2022-05-13

In a digital age where information moves in milliseconds and millions of participants can transact...

}
X