Get smart with beta

August 20, 2015 09:00 AM

The Trendrating Momentum Model is designed to capture medium- to long-term trends lasting a few months to a few years. The model filters out noise using 357 indicators based on price, arriving at eight that work together. A self-adapting algorithm adjusts the time duration of the indicators on the basis of short-term volatility. We provide a rating scale (A, B, C and D) based on the strength of the indicators where “A” signifies a strong bull trend and “D” an established bear trend.  A security with six positive indicators receives a “B” rating, indicating the beginning of a bull trend. When all eight indicators are positive, the security is rated “A,” signifying an established bull trend. 

If you’ve placed a bet on casino and gaming stocks globally during the past year, the trend has definitely not been your friend. Here we highlight the Market Vectors Gaming ETF (BJK), which according to the Trendrating Momentum Model, is currently “D” Rated (sell) and has been so for the majority of the analysis period (see “Not a safe bet).

When you break down the constituents of the ETF, however, you can find some strong momentum plays, which could have been leveraged to outperform the overall benchmark using a “smart beta” strategy.

Smart beta rebalances based on investment factors such as value, quality, momentum and size. After evaluating every stock in the applicable universe along each factor, an optimized portfolio is formed to maximize exposure to the targeted factors with a similar level of risk in a cost efficient and transparent way.  The goal is to enhance risk-adjusted returns above the cap-weighted index.

We created a momentum smart beta strategy for a portfolio of the underlying 46 constituents of the BJK. It looks back to the inception of the ETF (Jan. 22, 2008) where its weight was capped at 5% for any constituent and over-weighted “A” rated stocks 3 to 1 over “B”, “C” and “D” rated stocks. 

If you had allocated according to this strategy from July 20014 through June 2015, which stayed invested in all 46 constituents, you would have out-performed the BJK by more than 28% (see “Smart beta rules”).

About the Author

Rocco Pellegrinelli, Trendrating founder & CEO, began his career as a portfolio manager and investment banker and has since been a proven fintech entrepreneur for the past 20 years. He created Brainpower in 1996 and established it as one of the top portfolio management systems globally. After going public on the Frankfurt Stock Exchange in 2000, Brainpower was acquired by Bloomberg in 2006. @trendrating