Truth About ETF Rotation

Transcription

1 Truth About ETF Rotation Now on Amazon! Jackie Ann Patterson Editor, BackTesting Report 1

2 Required Disclaimers Investing and trading involve risk of loss and may not be suitable for everyone. The author actively trades stocks and ETFs. She may or may not hold a position in any instrument discussed. This presentation is for educational purposes and is not a recommendation to buy or sell securities. HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.

3 I m Jackie Ann Patterson Editor of BackTesting Report The computer engineer who back-tests trading strategies and indicators

4 Goals: Show You How to Get Respectable Gains with Low Overhead How you could have doubled your money in How to run a simple ETF Rotation 4

5 Agenda Compare 2 portfolio strategies Diversified Buy and Hold Rotation Demo Rotation with High Volume ETFs 5

6 Shout Out to Fidelity Investments Funded a round of back-testing research on sector rotation Published article at buy-and-hold-sector-rotation Disclosure: Independent contractor for Fidelity

7 Lessons From Back-tests on Wealth-Lab Pro for S&P Sectors lagged ishares Styles Momentum beat Bargain-Hunting 30-day look-back too volatile 30 ishares ETFs trade commission-free at Fidelity S&P500 easy to beat after 2000 Wealth Lab Pro is a registered trademark of FMC, LLC. 7

8 Its All Relative A Baseline for Comparison Diversified Portfolio Buy and Hold, rebalancing annually Least overhead Use mutual funds for longer track record than ETFs 8

9 The Funds 9

10 Portfolio Mix Exploration CAGR Curve 7.0% 6.8% 6.6% 6.4% 6.2% 6.0% 5.8% 90% 80% 70% 60% 50% 40% 30% 20% 10% % of Account Invested in Stock vs Bonds Hypothetical. Source: Jackie Ann Patterson portfolio simulation with Excel 10

11 Portfolio Mix Exploration Average Annual Return 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% 90% 80% 70% 60% 50% 40% 30% 20% 10% % of Account Invested in Stock vs Bonds Hypothetical. Source: Jackie Ann Patterson portfolio simulation with Excel 11

12 Max Drawdown Deeper with More Stocks Than Bonds 0% -10% -20% -30% -40% -50% -60% 90% 80% 70% 60% 50% 40% 30% 20% 10% % of Account Invested in Stock vs Bonds Hypothetical. Source: Jackie Ann Patterson portfolio simulation with Excel 12

13 Sharpe Ratio Increases as Stock Decreases Sharpe Ratio (2.8% risk-free rate) 90% 80% 70% 60% 50% 40% 30% 20% 10% % of Account Invested in Stock vs Bonds Hypothetical. Source: Jackie Ann Patterson portfolio simulation with Excel 13

14 Reference Portfolio Allocation 50% Stocks, 50% Bonds 14

15 Portfolio Rotation Definitions GOAL: Get in areas of market poised to deliver best performance NOT: intra-day trading NOT: Buy and Hold 15

16 Relative Strength Selection Historically Proven Criterion Rotate to ETFs with highest percentage gains Use Total Returns, including dividends 16

17 Details of Rotation Each week assess the portfolio Hold 2 funds Back-test with mutual funds Real life use ETFs Want top 2 percentage gainers, including dividends Keep a fund while it s gains are in the top half Rebalance yearly 17

18 Key Question: What Look-back Period? With back-testing can try them all Look for areas of good performance Beware isolated peaks of performance Remember: out of 30 trials, some settings will do better than others, just by luck 18

19 Best Look-back: 140 trading days Mutual Funds: 12% CAGR, -35% DD 15% 10% 5% 0% -5% -10% -15% -20% -25% -30% -35% -40% -45% % Hypothetical. Source: Jackie Ann Patterson portfolio simulation with Excel CAGR DD % 19

20 Add Long Bonds and Short Fund For Better Performance Hypothetical. Source: Jackie Ann Patterson portfolio simulation with Excel 20

21 Rotate to Cash Too When All Funds Going Down Reduced Drawdowns Before buying, check that 140-day rateof-change (RoC) is positive Buy top funds with positive RoC Sit in cash if RoC not positive 21

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23 ETF Rotation Equity Curves 23

24 Forward-Testing Live trading in my small IRA account $50,000 $49,500 $49,000 $48,500 $48,000 $47,500 $47,000 $46,500 $46,000 $45,500 24

25 Final Funds 25

26 My Forward-Testing Rotation Tools at TruthaboutETFrotation.com 26

27 What It Takes to Succeed With ETF Rotation Plan Simple numeric comparison 1 hour per week A little bit of self-discipline Show up for that hour per week Don t mess with positions otherwise Willingness to sell holdings on cue Market cooperation 27

28 Turn in Surveys for Drawing for truthaboutmacd.com Video Series

29 Thank You! For more information see divergence-alerts.com TruthaboutETFrotation.com Get the book at Amazon.com testingreport. com 29

30 Appendix 30

31 ETF Options Rotation Manually Back-Tested Two+ Ways Covered Calls +3 ATR OTM strike Calls as Leveraged Position Deep ITM Basic: Same number of shares with less $$ Aggressive: Risk 15% of account on each position Basic rotation strategy of ishares Style ETFs with Top 2 70-day RoC 31

32 Options Difficulties Thinly traded Huge bid/ask spread Sometimes no bid to sell covered calls Sometimes no options for underlying ETF Historical data spotty Options not trading on all ETFs Particularly on the leading ETFs after

33 1st Effort = FAIL $400,000 $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $- ETFs Only Options Aggressive Covered Ca 33