Financial metrics for ETFs are essential for evaluating the underlying health and performance of the fund. They allow investors to see beyond the surface and understand how the ETF's constituent companies are performing over time.
Scrab calculates various financial metrics for ETFs based on up to 600 of their largest holdings, which can be crucial for making informed investment decisions.
How to Use ETF Financial Metrics
Scrab calculates financial metrics for ETFs based on the largest 600 holdings, making the data available in both the Master Chart and Multi Chart.
Here’s how to effectively use these metrics:
Monitor Earnings and Margins: Track whether the earnings or margins of the ETF are increasing or decreasing over time. This can highlight the financial trajectory of the ETF’s holdings.
Analyze Valuation Trends: Evaluate how the valuations of companies within the ETF are changing. This includes metrics like the Price-to-Earnings (P/E) ratio, which can signal if the ETF is overvalued or undervalued.
Utilize Comparable Metrics: Focus on metrics that can be compared across different markets, such as margins (expressed in percentages). This provides a consistent basis for analysis.
Key Aspects of Scrab’s ETF Financial Metrics
Calculated Using Up to 600 Biggest Holdings: Scrab calculates metrics based on the largest holdings of the ETF to provide a representative analysis.
Proportional to Holdings’ Weights: The metrics are weighted according to the proportion of each holding within the ETF, ensuring an accurate reflection of the ETF's composition.
Historical Data Availability: Most ETFs have data available since 2019/2020, allowing for historical trend analysis.
Exclusion of Non-Equity Holdings: Metrics exclude non-equity holdings such as bonds and commodities to focus solely on equity performance.
No Distinction Between Short & Long Positions: Metrics do not differentiate between short and long positions, treating all holdings uniformly.
Requirement for Financial Data: At least 90% of the total ETF holdings' financial data must be available to ensure comprehensive analysis.
Practical Example
Consider an ETF that holds a diversified portfolio of technology stocks. By using Scrab's financial metrics, you can analyze the following:
Earnings Growth: Check if the aggregate earnings of the ETF's top 600 holdings are increasing, indicating strong performance.
Margins: Assess whether profit margins are improving, suggesting better operational efficiency.
Valuations: Examine the Price-to-Earnings ratios to see if the ETF’s holdings are becoming more or less expensive relative to their earnings.
For instance, if the earnings and margins are steadily increasing while the P/E ratio remains stable, it could indicate that the ETF is growing in value without becoming overvalued.
Conversely, if the P/E ratio is rising faster than earnings, it might suggest overvaluation, warranting a closer look or reconsideration of the investment.