In the follow up to our webinar about how to compose top performing ETFs strategies among the QuantTrader community last weekend, we received many interesting questions and ideas to follow up. One question in particular I´d like to share in a post, as it involves all our “All Strategies” subscribers.John L. asks: “Using a simple meta strategy by choosing the top two strategies from the previous month (from the monthly newsletter), and investing in them the next month (repeating that each month). I wonder if that can be backtested and compared to past 3 months or a static meta strategy. Perhaps comparing the top 2 each month strategy to the choosing the top 2 from the last 3 months. And comparing the top 2 each month or 3 months to a static strategy of the top 2 - 4 over the full backtest period or past 5 or 10 years.”So in other words, what´s the best way to pick from the Top Performing ETFs Strategies of the last months, and allocate equal amount of money among them? We publish the performance of all our strategies monthly in a handy ranking table, so it´s easy to pick each month the best performers of the last months, and repeat this throughout the year.The idea is appealing, as it is an enhancement from our Portfolio Builder Approach, where we apply modern portfolio theory to assemble a fixed weighting portfolio based on the historical performance and co-variance between the strategies. By modifying this to a momentum style “strategy picking” of top performing ETFs strategies we react to changes in the market and therefore overcome one of the critiques MPT receives frequently.Top Performing ETFs Strategies in one PortfolioI modelled this quickly in QuantTrader, following the “Strategy of Strategies” approach we introduced in QuantTrader in the last [...]
You can employ this strategy perfectly in your 401k investment, because it outperforms the stock market by more than double and this with one third of the volatility or risk. This means that since 2008, the return to risk ratio is about six times higher than an investment in the SPY ETF which tracks the S&P 500. Even this year, when many investors are selling bonds due to increasing yields through FED tapering, the bond rotation strategy has delivered positive double digit returns. The Bond Rotation Strategy (BRS) - an ideal 401k investment The BRS Strategy invests in the top one or top two ETFs out of a selection of five bond ETFs which is then rebalanced on a monthly basis. The backtested returns of the strategy since 2008 is very impressive compared to a traditional "buy and hold" strategy, thus making it ideal for any 401k investment. The data below refers to the returns for holding the top two ETFs in the strategy. The figures in brackets show the returns for holding the top ETF only. The top two ETF strategy has a slightly better return to risk ratio than the top one ETF strategy. So, for larger amounts of 401 investment money (> 100'000$), I would advise investing in the top two ETFs rather than simply holding one. Annual performance (CAGR) = 15.7% (19%) compared to S&P500=5.4% Total performance since 2008 = 133% (175%) compared to S&P500=33.1% Volatility (annualized) = 6.75% (9.45%) compared to S&P500=24.7% Return to Risk Ratio (Sharpe Ratio) = 1.79 or 1.68 compared to S&P500=0.25 Alpha compared to AGG = 62% Strategy performance 2008-2013 Black - Top one Bond Rotation Strategy Blue - Top two Bond Rotation Strategy Green - AGG iShares Core Total US Bond (4-5yr) Red - SPY SPDR S&P 500 The Bond strategy ETFs [...]
An analysis of Harry Browne´s Permanent Portfolio and further enhancements towards: A Permanent Portfolio ETF Rotation Strategy employing Momentum, Mean Reversion, and Volatility Targeting. It’s not just cars. It’s investment strategies like the permanent portfolio, too. Vintage "all-weather" investment strategies are often simple, easy to execute and give amble 'out-of-sample' data. In other words one can see how they performed in life years after they have been proposed. And like the VW bug, they are "safe" choices. Tried and true. Can you imagine a 1965 VW running in the Autobahn? Although the essence counts for a lot, for the car to survive at today's highway speeds the tech needs to be up to date. So let’s take my favourite oldie and bring it up to speed: Harry Browne’s Permanent Portfolio. The Permanent Portfolio by Harry Browne From Investopedia: … Browne believed that the four asset classes would thrive in one of the four possible macroeconomic scenarios that exist. Stocks would thrive during periods of economic prosperity. Bonds would do well in deflation and acceptably well during periods of prosperity. Gold during periods of high inflation would rapidly increase in value as the only true defence against a deteriorating currency. Cash would act as a buffer against losses during a routine recession or tight-money episode, and would act well in deflationary times. So let’s see how the original permanent portfolio Harry Browne first published has performed. The original rules of the All Weather Portfolio: 25% in a stock market Index ( S&P 500) 25% in Treasuries 25% in Gold. 25% in Cash or similar Not bad. Annual return is 7.1% and maximum draw-down comes in at 17.84% since 1992. For a far more detailed analysis of the so-called fail-save investment or permanent portfolio or "PP" you can see Gestaltu's excellent "PP Shakedown" [...]
In a previous post we introduced our new investment strategy, the BUG. There has been a lot of interest but also some concerns when it comes to using leverage. We are introducing a version of the BUG for non-leveraged accounts. In this version we allocate amongst 6 ETFs: SPY, TLT, GLS, CWB, TIP and PCY. Again as in the original strategy we use these heuristics: Timing (using a simple average rule), Volatility Targeting (we reduce exposure to more volatile ETFs), Momentum (we reduce the size of the worst performer and add to the rest). We don’t employ short term mean reversion and we only trade up to 4 assets.
Diversification is a cornerstone to successful investing. In simple form, when measurably diverse assets are combined in a portfolio, the investors portfolio risks are reduced without any sacrifice of returns. This is a rare “free lunch”, it is well accepted part of modern financial portfolios, and to stay financially healthy it is important not to skip lunch. When one asset is going down while the other is going up, the portfolios risk is reduced without the normal penalty of risk/return trade-offs. We take advantage of that when our systems dynamically blend things like the S&P 500 and treasury bonds, which often exhibit negative correlation to each other (which is ideal). Applying Portfolio Diversification to Strategies: Our subscribers can take this take a step further. Our investing algorithms take on a blend of the properties of their underlying assets combined with the “alpha” edges from the investing rules. The returns of each investing strategy should be thought of as an asset, which are different and unique from the underlying holdings. So holding a portfolio of strategies functions much like holding a portfolio of assets. To evaluate the risk profile of the strategy, we examine the history of the returns of those strategies, much like when holding a basket of stocks the historical returns of each stock would be evaluated.
This strategy backtest uses the Vanguard VFINX/VUSTX index funds as a proxy to the SPY/TLT ETFs. With these Vanguard funds I have made a 20 year backtest for the UIS strategy. 20 years Strategy backtest of our Universal Investment Strategy I made this strategy backtest, because many subscribers asked for it, and because with these two Vanguard funds, this is also one of the only strategies which can be backtested for such a long period. In general however, I think that it is much more important, how a strategy performed after 2008. The market has changed considerably during these last years, and if you would only invest in strategies which can be backtested 20 or more years, then you would have missed most of the investment opportunities of the recent years. For the backtest, I use our QuantTrader software. You see the screenshot of the results below. The upper chart shows the VFINX/VUSTX performance. The middle chart shows the allocation with red=treasury and yellow=S&P500. Overall, you can say that for buy and hold investors, treasuries have been the better investment for the last 20 years in this strategy backtest. The sharpe ratio (return to risk) of the VUSTX treasury is 0.79, while the sharpe of the VFINX S&P500 fund is only 0.5. With VFINX/VUSTX combined, the strategy achieves a sharpe of 1.28, which is more than double the return to risk ratio of a stock market investment. This means that instead of investing 100'000$ in the US stock market, using leverage, you could invest 250'000$ in the UIS strategy. This way you would have had the same risk, but nearly 30% annual return. The strategy backtest shows a very smooth equity line and the real max drawdown is well below 10%. The 11.68% drawdown peak measured in 2008 was in fact only an extreme mean-reversion [...]
On November 2013 I published the first SA article on the Bond Rotation Strategy (BRS) as excelent diversifier for a 401k Investment Portfolio. Now, 15 months later, I am presenting an important update for this strategy with adaptive allocation. Even though the old strategy has done well (see charts here: https://logical-invest.com/strategy/bond-rotation-sleep-well/), I think it is very important to constantly validate and improve any investment strategy. Markets change, ETFs change even we ourselves grow and learn. Especially as I´ve been approached by US Investors asking whether this was a suitable strategy for 401k Investment Portfolio. I am also glad to say that I am still improving my knowledge and striving to pass that knowledge as to grow the returns and limit the risk of my own investments. Approach of Universal Investment Strategy, better suited as 401k Investment Portfolio In November 2014 I presented the Universal Investment Strategy which was based on a variable allocation of the SPY-TLT ETFs (http://seekingalpha.com/article/2714185-the-spy-tlt-universal-investment-strategy). This new concept of an ETF rotation with variable allocation is very versatile and can be used on all types of strategies. For the BRS strategy, this new way to calculate allocations results in a considerably improved Sharpe (Return/Risk) ratio of the strategy. Here is the ETF selection for the BRS Old ETF selection New ETF selection CWB - SPDR Barclays Convertible Bond CWB - SPDR Barclays Convertible Bond JNK - SPDR High-Yield Junk Bond (4-7yr) JNK - SPDR High-Yield Junk Bond (4-7yr) TLH - iShares 10-Year Treasury (9-11yr) TLT - iShares Long-Term Trsry (15-18yr) PCY - PowerShares Emerging Mkts Bond (7-9yr) AGG - iShares Core Total US Bond (4-5yr) not necessary anymore BOND - PIMCO Total Return ETF not necessary anymore SHY - Barclays Low Duration Treasury (2-yr) not necessary anymore. The total allocation can go automatically below 100% An advantage of [...]
The World Country Top 4 ETF rotation strategy – A way to fight rising rates and a stalling US stock market
Summary of World Country Top 4 ETF rotation strategy • The World Country Top 4 ETF rotation strategy is a strongly momentum driven strategy creating high returns. • The strategy profits from a maximum global diversification. • With a 20-year CAGR of 20.7% the strategy has a much lower volatility and lower risk than an S&P 500 investment. In my last articles I described various momentum ETF rotation strategies with variable allocations using our maximum Sharpe method. A good example how to build such a strategy is the Universal Investment Strategy (UIS) which always invests in a variable allocation of TLT and SPY. However, UIS is a strictly a U.S.-based equity and bond strategy. In the short term, this strategy cannot do much better than its own underlying ETFs, namely SPY and TLT. Today, many market analysts are less optimistic about the US market. The US stock market may have culminated after 6 very strong years following the 2008 subprime crash. Treasuries, at least in the past 2 months, are underperforming as they begin to anticipate rising yields. It is possible that the UIS strategy underperforms for a few months. Keep in mind that the UIS strategy has been backtested for more than 20 years and I am quite sure that it will continue to work in the future. However, as with ETFs, every so often, one has to evaluate which strategies outperform and possibly switch some capital to the better performing ones. Several new ETF rotation strategies under development We have several new strategies under development (e.g., Countries, Nasdaq 100, Dow 30, US Industries) and we are already investing in these strategies, as to validate them before publication. To address an underperforming US market, I think the best of these strategies is the Country rotation strategy, which always invests [...]
This is the monthly monthly Logical-Invest newsletter for June 2015. From now on this newsletter will replace the individual comments for the single strategies. The newsletter includes a strategy performance overview which can help you to switch between strategies. The same table is available if you login to your logical invest account at "My Account" and select the strategy performance menu. The table on the website is a dynamic table and will be updated every day. This way you can easily compare the performance of the different strategies. There are times when a subset of strategies may lag, like this is the case at the moment for all strategies which invest in bonds. Using the dynamic table you can click on the column headers and sort the table by any of the columns. If you sort for example by 3 month Sharpe, then you see which strategy performs best in the current rising rates sideways market environment. If you sort by 12 or 36 month Sharpe, then you see which strategy performs best over a period which includes also some market corrections. The table also includes the most important benchmarks SPY, TLT and AGG. Here is now a static copy of the table sorted by year to date performance. Strategy performance overview: symbol close year to date % ▴ 3 month % 1 month % 1 day % 60 day volatility 60 day correlation 3 month Sharpe 12 month Sharpe 36 month Sharpe LastModified: 5/29/2015 UIS-SPXL-TMF 6151.80 11.42 -2.39 1.15 -1.50 26.65 0.79 -0.48 3.40 3.22 MYRS 626.86 7.04 2.37 3.55 -0.03 16.39 0.62 0.91 2.21 3.04 WORLD-TOP4 283.91 6.53 -1.07 -1.40 -0.83 13.76 0.67 -0.44 3.13 3.21 GMRS 4408.85 5.63 -0.26 1.13 -0.58 10.24 0.75 -0.15 0.47 1.59 GSRLV 499.13 4.56 -1.38 0.10 -0.54 9.78 0.64 -0.77 2.35 2.33 UIS 476.65 3.90 -0.30 [...]
Intelligent Algorithms run two prallel sub-strategies. Meta- layer chooses between the two sub-strategies based on current market conditions. Variable allocation to Treasuries provides protection from large drawdowns. This strategy is a good fit for investors that want to invest intelligently in the U.S. equity market as well as for stock-pickers looking for a rules-based growth strategy. The strategy can also complement our existing strategies and can work well with our more conservative strategies like BRS (bond rotation), the BUG or with non-U.S. equity strategies like World Top 4.