A.I.M. Users Bulletin Board

[SFSecurity]

Okay, Gang, We've talked about the Altman Z-Score and how it only applies to stocks, not ETFs. So I've be thinking - dangerous occupation - and looked at IYR in particular and I think I've come up with a way to use the underlying positions to assign a pseudo Z-Score to an ETF.

Here's what it looks like in a spreadsheet:

 ETF Name - IYR 
    Column Headings		 
 #1 "Top Stocks in ETF"       
 #2 "% of total of the ETF expressed as a decimal"  
 #3 "Z-Score"  
 #4 "Z-Score Multiplied by % of holdings"  
      
  #1       #2     #3       #4 
 SPG	0.0706	1.77	0.124962 
 AMT	0.0510	1.46	0.07446 
 PSA	0.0350	18.69	0.65415 
 CCI	0.0338	1.35	0.04563 
 PLD	0.0296	1.07	0.031672 
 HCN	0.0290	1.24	0.03596 
 EQIX	0.0271	2.19	0.059349 
 VTR	0.0261	1.25	0.032625 
 			 
 Totals	0.3022	    	1.058808 
 			 
 "% Total of Percentage of Positions divided into 1"  3.31		 
 			 
 Multiply 1.058808 by 3.31 to get the Pseudo Z-Score 3.50

The "% Total of Positions divided into 1" 3.31 is the number of times one would have to multiply the total percentage of the samples to equal the ETF total of 100%. The rest is pretty straight forward.

This example illustrates both the good and bad about this approach. The good is that it gets one to look at the underlying positions which might have some weight in evaluating the merit of the ETF.

The bad is when you get an outlier like the one in red above, it will distort the final Z-Score, making it seem that things are okay. If that had been a more reasonable figure like 3 then the Z-Score would be 1.69, much more in line with the rest of the sample.

Anyway, it might help in evaluating the response an ETF might have if a significant percentage of their positions went down due to market conditions. This might apply more to single sector funds, say oil as an example. When the price of oil dropped almost all of the underlying positions are likely to take a hit, affecting the ETF.

Best,

Allen