First launched in the early 90s, Exchange Traded Funds (ETFs) have continued to proliferate on Wall Street. Today, there are more than 170 ETFs listed for trading — an increase of more than 50 in less than two years. These instruments, which trade like regular stocks, represent everything from major stock indices to specific market sectors and instrument groups (bonds, etc.).

The appeal to investors and traders is twofold. First, people can buy assets that closely replicate the returns of popular market indices fund managers use as benchmarks. Second, traders can use sector ETFs to capitalize on specific market areas that are outperforming the broad market.

"Following the money: Quarterly momentum and ETFs" (Active Trader, June 2002) detailed a strategy for identifying ETF leaders early in the quarter. The premise was that money managers will commit capital to stocks offering the best opportunity for profit for the quarter. Thus, the ETFs leading the market at the beginning of a quarter had the potential to maintain their dominance for the entire quarter.

The following analysis reviews the findings of that article and, using the same procedures, explores how its concepts have held up in the eighteen months since publication.