Vanguard allows us to take a keen look at a very well diversified portfolio of ETFs. Analyzing their trend strength offers insight in to market action, and offers guidance into constructing profitable portfolios for our own purposes.
Chart 1: This trend strength distribution analysis of the universe of Vanguard ETFs shows that fully 60% (mostly equity related ETFs) are trending higher strongly. Bond and bond-related ETFs are at the right hand edge, trending lower strongly.
1. Market Trend Strength is broad and deep
I used Chande Trend Meter data on 63 Vanguard ETFs to rank them by their trend strength, to obtain a trend strength analysis of the entire group of Vanguard ETFs. As Chart 1 shows, a majority of Vanguard ETFs are trending higher very strongly.
2. Bond funds are trending lower
Bond funds are trending lower, along the right hand edge of Chart 1 and below in Chart 2. The average SCTR value of 15 bond and bond-related (REITs, utilities and mortgage backed securities) is only 8.2. The average CTM for these 15 bond funds is about 33, four have CTM between 20~30 and four have CTM < 20. This means the interest rate sensitive ETFs are trending lower persistently.
Chart 2: Interest rate sensitive Vanguard ETFs are trending lower, and show low SCTR and CTM values.
3. Non-US stock ETFs are leading the CTM trend strength table
The top four trending Vanguard ETFs are focused on non-US stocks. The exact geographic focus of each of these ETFs is different, but they are not primarily using US stocks. The weak dollar and synchronized global growth phase has drawn capital into these ETFs.
Chart 3: The strongest trending ETFs have mostly non-US equities.
4. All styles of US portfolios (Value, Growth and Blend) are trending higher
Vanguard has ETFs based on market capitalization, grouped into growth, value and blend, so that we can get a keen look at how the market is doing on a capitalization and portfolio construction basis. Chart 4 shows the trend check carpet for just blended portfolios, but the carpet is all green for growth and value portfolios as well. This means there is a well-entrenched uptrend in the US market.
Chart 4: Blended portfolios constructed by capitalization are all trending higher across all time frames. This means the market trend is strong and broad.
5. Mega Cap Stocks are gaining strength versus small stocks
I take advantage of the blended large-cap ETF (MGC) and the blended small-cap ETF (VIOO) to show that mega cap stocks are performing relatively more strongly than small cap stocks. The ratio of mega cap to small cap value and growth ETFs is also in favor of mega cap stocks. Thus, mega- caps may be more attractive at the moment.
Chart 5: The most recent rally has seen mega cap stocks performing relatively better than their small cap equivalents. When MGC is stronger than VIOO, the ratio rises.
6. What to do about it
There are very many ways to use this analysis. Here are a few suggestions. Naturally, this analysis is only a snapshot in time, and the internals of market performance will vary over time.
1. The US market is trending strongly, so it is probably best to remain invested, even through any pullbacks.
2. Counter-trend traders may wish to evaluate the attractiveness of bond funds. If you have large bond positions, the price trend needs further analysis.
3. Non-US stocks may deserve some room in your portfolio.
4. Mega-cap stocks may be worth an extra look, relative to their small cap equivalents, especially for individuals.
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