Section 1. Overview
Institutional Insights is a daily research and information service providing insight into the forward-looking price forecast and detailed risk profile for over 300 Exchange Traded Funds (ETFs).
The information and statistics generated by Institutional Insights are based on the actual trading activity of the block traders and market makers that specialize in a particular market or security. Knowledge of the price forecast and trading behavior of large institutional players can provide an edge for any professional investor or money manager.
The information contained herein can be used both strategically for macro analysis and asset allocation, as well as tactically with respect to discrete trading decisions, idea generation or timing of entry and exit positions.
Section 2. Daily Insights
Daily Insights is a list of ETFs ranked in terms of greatest probability of upward price movement in the near term and associated risk metrics (see Time Element below for more information on the time frame associated with the price forecasts).
At the end of each market day, the trading data for over 300 ETFs is downloaded, processed through numerous algorithms and proprietary computations and a new ranking of all 300 is generated. All currently tracked ETFs make it into the Daily Insights for the next market day. It is important to note that the data analysis not only takes into account the current day's trading data but also uses historical analysis to refine results and improve statistical accuracy and reliability.
A unique feature of Institutional Insights (a first in the industry) is the availability of detailed statistical price data including the Odds and Payoffs both to the upside and downside for each ETF listed in Daily Insights, along with a Combined Odds and Payoff's calculation and Target Price for easier trade management.
The default order each day is based on user preference, either ascending or descending. Also included in the information is a description of the ETF and asset class associated with each.
The detailed odds and payoff information allows subscribers to see those ETFs with the greatest odds of price movement along with the corresponding payoff (percent gain or loss) associated with those odds. This feature presents a unique opportunity to create and manage an ETF portfolio around a specific risk profile.
For example, on any given day, upside odds could, hypothetically, vary from 65% to 85% and, while the ETF with lower odds may present a greater return payoff, the higher odds opportunity (even with a lower payoff) may be more in line with the risk profile of that particular investor. Or perhaps, an investor selects both opportunities but varies the capital invested in each trade. (See Strategy Development for more information on trading strategies.)
As the market ebbs and flows, there will be days in which the odds and payoffs indicate many good investment opportunities from which to choose, and other days relatively few (or none). Low odds across the entire field serves as important information as the market makers are indicating that the best course of action may be to conserve cash. Likewise, low odds across broad index ETFs and high odds amongst the inverse index ETFs would suggest that the investment professionals are taking a strong bearish position.
Section 3. Allocation Insights
Allocation Insights is also a daily ETF ranking service, the difference being the ETFs are grouped by asset allocation category. Each day, all able to be ranked ETFs in each category are presented for review. Clicking any symbol takes you to its data in the Daily Insights table.
Hovering the mouse cursor over any ticker symbol reveals its Exit Price. We have also included the category average just below the category name as a reference point to how that particular category is being graded by the block trading community.
Allocation Insights is designed for the professional money managers who regularly construct client portfolios based on asset allocation models. This feature serves as a ready guide for idea generation and security selection. It is also a valuable guide to the block trading community's forward-looking price perception across broad asset classes or investment themes.
Section 4. Subscriber Profile
Institutional Insights is intended for boutique money mangers, independent advisors and other professionals fighting to gain an edge in the market. Ready access to powerful information is a competitive necessity and our goal is level the playing field across all classes and sizes of professional investors.
Achieving success in the investment world is the ultimate art-meets-science exercise and we offer a unique approach to providing one of a kind, tactical insights into the predicted price movement of the universe of ETFs.
While we can provide some guidance as to the proper way to use the service and understand what the data are communicating, realize that the flexibility and granularity of the information offers a variety of paths to reaching your short- and long-term return objectives.
Section 5. Portfolio Management
Portfolio optimization and management is nontrivial subject and area of study in and of itself. The Institutional Insights data has been used to manage portfolios with as few as ten holdings and as many as forty. As a general guideline, it is our recommendation that portfolios maintain between fifteen and thirty open positions at full allocation.
Keep in mind that there are appropriate times to not be fully invested in the market: ramp up of a new portfolio, inability to find quality replacements for closed positions, your own perspective on the macro economic landscape.
Individual position size may vary based on your trading strategy and risk profile. An appropriate guideline would be between 3% and 7% with no more than 10% allocation for any one ETF (even if acquired in several tranches over time). See Strategy Development below for more information.
Section 5. Time Element
After many years of tracking the data and subsequent results, the average holding period before reaching the target price is 44 market days or approximately two calendar months. However, some ETF selections have reached the target price in a matter of days or weeks while others may take up to six months.
Each subscriber should develop a time frame that works best for them, understanding that the average time for maturity of individual trades based on Institutional Insights can be up to several months. Generally a maximum holding period between three and six months is appropriate.
One concept worthy of consideration is the notion of internal rate of return (IRR) or annualized rate of return based on time as the trade unfolds. For example, if the price of an ETF runs up within the first few days or weeks of trade it will inherently have a high IRR but if the price plateaus before achieving the exit price the passage of time will begin to erode the IRR. It may be prudent for a trader to consider closing the position after a strong initial run-up and replacing it with a new selection from Institutional Insights.
Section 7. Expected Gain
Each ETF listed in the service includes a target price, which generally represents between an 8% and 12% gain on the trade. Remember, the target price is calculated based on the price expectations of the block trading community but is a blended target across all the market makers for that particular security. Our experience with the data indicates that prices sometimes run up just shy of the target, sometimes pass right through it and sometimes hit the target perfectly before retreating.
A disciplined approach to using this data would indicate holding the security until the price is achieved, then book the profit and look to the data for a new position.
The only enhancement to this approach would be taking the element of time into consideration. If a significant portion of the expected gain has been achieved in a relatively short period of time, perhaps consider booking the gain at a high IRR and then search for a new opportunity.
Section 6. Strategy Development
The strategy for the Scorecard was intentionally crafted to be simple: top ranked ETFs with a combined odds and payoffs of greater than 5% where purchased at the open on the next trading day. The position was held until either (i) the price target was achieved, or (ii) timed out by reaching the end of the six-month maximum holding period, or (iii) a -7% trailing stop was triggered.
The factors one should consider when formulating a strategy or investment plan should include the following:
- Amount of money allocated to the strategy
- Number of positions (minimum and maximum)
- Average position size (minimum and maximum)
- Maximum holding period
- Exit strategy: at target price, within percent of target price or after significant run up over a short period of time.
- Concentration limits: limits on asset class, sector, use of leverage, etc.
- Upside odds threshold (greater than x %)
- Upside payoff threshold (greater than x %)
- Combined odds and payoffs threshold (greater than x %)
- Downside odds and payoff analysis
- Stop loss discipline (fixed or trailing)
It could be suggested that upon review of the trading practices of ten different subscribers, one would see ten different approaches. Ultimately what matters most is selecting opportunities with the greatest odds of success and a payoff that justifies taking the risk.
Although most ETFs maintain inherent diversification by way of the basket of stocks that are held, many target a unique sector, region or asset class. Prudence in diversification is recommended and it is advised that a minimum of 15 positions be held (at full allocation) and a concentration limit of no more that 10% in any one ETF.
All ETFs are not created equal when it comes to risk. Commodity, currency, inverse index and leveraged ETFs offer great opportunity for upside but should be used with caution and moderation.
Perhaps the most important concept is one of discipline. Discipline in terms of using the service regularly to create and manage a portfolio and discipline to allow the positions time to mature. Drawdowns are an inevitable consequence of trading and a reality of any investment strategy.
Opinions differ amongst investment professionals on the use of stop loss orders and trailing stops. While they may offer downside protection, they can also book a loss that might have otherwise turned successful over the life of the trade. Given the current market conditions we recommend using a stop loss. For purposes of the study we used an industry standard -7%. You may wish to use something higher to even an amount based on the potential upside in a given trade.
Sample Strategy:
Below is a simple example of a strategy that could be employed using Institutional Insights' information. Each investor should develop a strategy that suits his or her own risk profile, time available and investment experience. Also note that in the example below we used 80% upside odds: given the conservatism seen in the data during this current market dislocation that threshold may need to be reduced to 75% upside odds until the market stabilizes.
- Portfolio maintaining approximately 20 ETFs at full allocation
- Position size for each is 5%
- Threshold for consideration is:
- Combined Odds & Payoffs greater than 8%, AND
- Upside Odds greater than 80%
- Positions closed when either:
- Target price achieved, OR
- Position has been held for three full months
- New selection is made from Daily Insights as positions are closed
- Trailing Stop of -7% on all positions.
- Exceptions:
- If a position appreciates to within 90% of the gain indicated by the target price in the first month of holding, consider closing and replacing with new ETF
Again, the example above is a hypothetical strategy for purposes of education. Each subscriber should take into account their own experience, risk tolerance and trading practices to create an approach that works best for them.
Section 7. Exchange Traded Funds
Although the majority of ETFs offer a high degree of diversification, it is important to remember that many are sector, industry or region specific. As such the entire asset class that comprises the portfolio of securities maintained by the ETF can and will be impacted by geopolitical events, macroeconomic forces and short-term unpredictability.
Additionally, a few ETFs (including some covered by Institutional Insights) are tied to the price movement of specific currencies or commodities. These ETFs offer virtually no inherent diversification and should be considered directional price speculation for the underlying asset. Since we do include those in our coverage, many subscribers may opt to trade such in an actively managed portfolio, but caution should be maintained and discretion employed when opening each new position.
One approach to gaining exposure to these asset classes while managing risk would be to trade a smaller position size compared to the amount allocated to more diversified ETFs.
Section 8. A Few Final Words
The data presented in this service is based on the population of block traders and institutional investors that drive the markets. However, that community of participants is comprised of people. People who strive to behave rationally and trade effectively, but people who invariably make mistakes and become affected by human emotion. Even the professionals can and do error from time to time.
In order to be successful in using this or any strategy, the trader must be disciplined in their approach to investing. Develop a strategy that makes sense for you and follow through on execution according to a disciplined plan.
Several decades have gone into the development and creation of this service and the ETFs presented are the collective and distilled recommendations of the most elite community of traders. It is up to you to use the information responsibly, maturely and professionally to maximize your own investment success.