Can I invest in the top 2 ETFs of a strategy?

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Can I invest in the top 2 ETFs of a strategy? 2017-03-03T15:27:27+00:00
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  • Frank Grossmann
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    Post count: 159

    Beginning of 2014 the Global Market Rotation strategy switched to Treasuries. I by myself and also several strategy subscribers think that the long term bull market is still going on and perhaps it is too early to switch 100% into Treasuries.
    Below you see the ranking table. EDV and MDY are still very close. The ranking difference is only 0.16. In such a case it is no problem to invest 50% EDV and 50% MDY.

    The ETF ranking for this month (March 2014) is:

    Symbol close year % 3 month % month % 20 day vola 20 day corr ranking allocation %
    EDV 97.7300 10.0935 7.5848 0.3491 14.1009 -0.5040 1.8400 100.0000
    MDY 250.3900 2.5348 5.5830 4.8622 16.2669 0.9367 2.0000 100.0000
    FEZ 42.3600 0.3791 3.9764 6.5392 15.6063 0.9120 3.0000 100.0000
    SHY 84.5600 0.2371 0.0710 0.0355 0.4724 -0.0269 3.1600 100.0000
    EPP 46.9500 0.4708 -0.8657 7.0207 17.2004 0.8005 5.0000 100.0000
    EEM 39.4800 -5.5502 -4.3605 3.3778 19.7703 0.7734 6.0000 100.0000
    ILF 33.8200 -8.6933 -10.6001 2.5159 25.4742 0.7578 7.0000 100.0000

    This 50% EDV and 50% MDY combination is a very good combination if you have sideways going markets with no clear trend. It is basically the same as the more or less permanent TMV hedge which I proposed some month ago. Only if the markets really go down, then you would have a much better performance with a 100% EDV investment.

    The below chart shows you the result of holding 50% EDV and 50% MDY all the time since 2008. EDV and MDY are most of the time negatively correlated which reduces a lot the volatility of such a strategy. Even 2013 which was one of the worst years for Treasuries, this strategy produced positive returns. So the combination of EDV with MDY is much better than a 100% investment in MDY.

    So, the conclusion is, if EDV is in the top 2 ranks, then there is no problem to run a top 2 ETF strategy, however if EDV is at the end of the ranking, then you should not add Treasuries to the top stock market ETF.

    Blog14

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