Upload
phungduong
View
215
Download
0
Embed Size (px)
Citation preview
Truth About
ETF Rotation
© Own Mountain Trading Company 2012 1
Jackie Ann Patterson
Editor, BackTesting Report
Now on
Amazon!
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.
© Own Mountain Trading Company 2012
The computer engineer who back-tests
trading strategies and indicators
I’m Jackie Ann Patterson –
Editor of BackTesting Report
Goals: Show You…
How to Get Respectable Gains
with Low Overhead
How you could have doubled your money
in 2004 – 2009
How to run a simple ETF Rotation
4 © Own Mountain Trading Company 2012
Agenda
Compare 2 portfolio strategies
Diversified Buy and Hold
Rotation
Demo Rotation with High Volume ETFs
5 © Own Mountain Trading Company 2012
Shout Out to Fidelity Investments
Funded a round of back-testing research on sector rotation
Published article at https://guidance.fidelity.com/viewpoints/buy-and-hold-sector-rotation
Disclosure: Independent contractor for Fidelity
© Own Mountain Trading Company 2012
Lessons From Back-tests on Wealth-Lab Pro® for 2002 - 2011
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
7
Wealth Lab Pro is a registered trademark of FMC, LLC.
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 © Own Mountain Trading Company 2012
The Funds
9 © Own Mountain Trading Company 2012
Portfolio Mix Exploration
CAGR Curve
10
5.8%
6.0%
6.2%
6.4%
6.6%
6.8%
7.0%
90% 80% 70% 60% 50% 40% 30% 20% 10%
% of Account Invested in Stock vs Bonds
© O
wn
Mou
nta
in T
rad
ing C
om
pa
ny 2
01
2
Hypothetical. Source: Jackie Ann Patterson portfolio simulation with Excel
Portfolio Mix Exploration
Average Annual Return
11
0%
1%
2%
3%
4%
5%
6%
7%
8%
9%
10%
90% 80% 70% 60% 50% 40% 30% 20% 10%
% of Account Invested in Stock vs Bonds
© O
wn
Mou
nta
in T
rad
ing C
om
pa
ny 2
01
2
Hypothetical. Source: Jackie Ann Patterson portfolio simulation with Excel
Max Drawdown Deeper with
More Stocks Than Bonds
12
-60%
-50%
-40%
-30%
-20%
-10%
0%
90% 80% 70% 60% 50% 40% 30% 20% 10%
% of Account Invested in Stock vs Bonds
© O
wn
Mou
nta
in T
rad
ing C
om
pa
ny 2
01
2
Hypothetical. Source: Jackie Ann Patterson portfolio simulation with Excel
Sharpe Ratio Increases as
Stock Decreases
13
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
90% 80% 70% 60% 50% 40% 30% 20% 10%
% of Account Invested in Stock vs Bonds
Sharpe Ratio (2.8% risk-free rate)
© O
wn
Mou
nta
in T
rad
ing C
om
pa
ny 2
01
2
Hypothetical. Source: Jackie Ann Patterson portfolio simulation with Excel
Reference Portfolio Allocation 50% Stocks, 50% Bonds
14 © Own Mountain Trading Company 2012
Portfolio Rotation Definitions
GOAL: Get in areas of market poised to
deliver best performance
NOT: intra-day trading
NOT: Buy and Hold
15 © Own Mountain Trading Company 2012
Relative Strength Selection Historically Proven Criterion
Rotate to ETFs with highest percentage gains
Use Total Returns, including dividends
16
© Own Mountain Trading Company 2012
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
© Own Mountain Trading Company 2012
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 © Own Mountain Trading Company 2012
Best Look-back: 140 trading days
Mutual Funds: 12% CAGR, -35% DD
19
CAGR
DD %
Hypothetical. Source: Jackie Ann Patterson portfolio simulation with Excel
-50%
-45%
-40%
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20
40
60
80
100
120
140
160
180
200
22
0
240
260
280
300
© O
wn
Mo
un
tain
Tra
din
g C
om
pa
ny 2
01
2
Add Long Bonds and Short Fund For Better Performance
20
Hypothetical. Source: Jackie Ann Patterson portfolio simulation with Excel
© O
wn
Mou
nta
in T
rad
ing C
om
pa
ny 2
01
2
Rotate to Cash Too When All Funds Going Down
Reduced Drawdowns
Before buying, check that 140-day rate-
of-change (RoC) is positive
Buy top funds with positive RoC
Sit in cash if RoC not positive
21
22 © Own Mountain Trading Company 2012
ETF Rotation Equity Curves
23 © Own Mountain Trading Company 2012
Forward-Testing Live trading in my small IRA account
24
$45,500
$46,000
$46,500
$47,000
$47,500
$48,000
$48,500
$49,000
$49,500
$50,000
© Own Mountain Trading Company 2012
Final Funds
25
My Forward-Testing Rotation Tools
at TruthaboutETFrotation.com
26 © Own Mountain Trading Company 2012
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 © Own Mountain Trading Company 2012
Turn in Surveys for Drawing for
truthaboutmacd.com Video Series
Thank You! For more information see…
divergence-alerts.com TruthaboutETFrotation.com
Get the book at Amazon.com
29
jackiep@back
testingreport.
com
© Own Mountain Trading Company 2012
Appendix
30 © Own Mountain Trading Company 2012
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
© Own Mountain Trading Company 2012
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 2009
32 © Own Mountain Trading Company 2012
1st Effort = FAIL
33
$-
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
$350,000
$400,000
ETFs Only
Options
Aggressive Options
Covered Calls
© O
wn
Mou
nta
in T
rad
ing C
om
pa
ny 2
01
2