Proposed ETF Portfolio for Rotational System
I have to say that I’m very thankful that I asked for the collective wisdom of the blogosphere. The comments were very helpful and have absolutely solidified my thinking in how to approach this next ETF rotational system.
Okay, so the final step before we jump into this system is to decide the portfolio of ETFs on which to test.
My thoughts about this portfolio are simple. The ETFs should be liquid, cover the S&P500 sectors, contain some country specific ETFs, some commodities, and some inverse ETFs. I do not want leveraged ETFs and ideally we are looking for more than 5 years of trading.
I believe the list meets my goals, except the inverse ETFs are not quite as liquid as I hoped for and some of the ETFs have only been trading for a few years.
If there are any ETFs that you believe should be added or subtracted, please let me know in the comments section.
Some of the commodity related etfs are going to have inefficiencies due to the contract rolls in the futures market. I assume previous price takes that into account, but you may want to look at different etfs (UCO vs USO).
Yeah, forgot about that. Thanks!
Good timing & synergies with this system & PPT avg hybrid score, and the new Fidelity commissions model that takes effect today. 25 iShares ETFs have unlimited free trades, with many you’ve already proposed.
Neat. I’ll have to go to Fidelity and check it out.
Coal and Steel? KOL and SLX. When they’re hot, they’re HOT!
How about shippers? SEA. Same thing, hot is HOT!
Dave, agreud, but I’m worried about liquidity with these. Maybe I’ll add them but then put in place a liquidity filter. That way if they continue to see increased volume, perhaps they pass the filter.
Then you would want to remove PSQ, because that’s thinly traded too and net assets are quite small. MOO isn’t that great either. not much better than KOL in terms of trading volume.
Dave, I have no opinion on MOO. It was a little thin but I left it in for diversification.
PSQ will stay as it is one of the few non-leveraged inverse ETFs.
Wood,
I have found in my ETF system testing that having a liquidity filter of share volume of greater than 400,000 helps eliminate the less liquid ETFs and can even improve the system stats at times since the low liquidity ETFs can do some funky things.
Wood,
In addition to the contract rolls that Steve noted, USO and UNG are limited partnerships. While trading gains/losses in these ETFs would still fall under capital gains tax rules (just like other stocks and ETFs), there are other tax issues related to trust income that might make these unattractive. If I remember correctly, if you hold these for even a short time, you get a Schedule K-1 and have taxable trust income due to your share in the LP.
KTB
Thanks KTB. You know, I have never like USO or UNG. I may just exclude them.
One other consideration - two of your selected ETFs are HOLDRs. If you keep these in the list, you will need to account for the fact that they can only be purchased in round-lot increments. HOLDRs might also confound your backtest results, as they occasionally do “funky” things - for example, if you have one in your portfolio and a member company has a stock-affecting event (merger, acquisition, spin-off, etc) one might wind up with shares of a single company’s stock in addition to the original lot of HOLDRs. This would become a source of gain/loss that you’d have a difficult time backtesting for (don’t know if it would be significant).
Wood,
I’d create two lists, one with short ETFs and one without for testing purposes. The last decade will dramatically skew results in favor of shorting, I suspect, whereas if you were able to create a similar strategy for previous decades, the results would look vastly different.
Love reading your blog, thank you!
t., good idea. I will certainly remove the inverses for some tests to see the changes.
ETf’s for consideration:
TAN, XLY, IYT, SMH
Johnny,
TAN=too thin
XLY= definitely, don’t know how I missed it, thanks
IYT= pretty thin, but might be a valuable addition
SMH= definitely, don’t know how I missed it.
Thanks!
The FX ETFs don’t quite match your criteria for length of trading history, but they might be worth evaluating. The few that come to mind are FXA, FXC, FXE, and FXY.
These might also fall short from a volume perspective.
Just a thought.
Dave
Dave, thanks. With the exception of FXE, they are pretty thin. Good suggestion though. I may add FXE in case the volume picks up. Until then, it can get filtered out.
Wood,
The latest from CXO is worth reading re momentum based sectors strategy.
http://www.cxoadvisory.com/blog/internal/blog2-03-10/
Excellent, thanks.
Wood,
Did not see MDY - for Midcap.
I would also echo KTB’s comment about round lot trading for holders. Tough to trade OIH (unless your portfolio size is large enough) in multiples of 100 shares. A ETF with almost 1.0 co-relation to OIH is XES, but does not have as long a trading history.
Regards
Here is the portfolio. I did make some changes. I’m still open to more ideas.
DBA
DBC
DIA
DOG
EEM
EFA
EWC
EWH
EWJ
EWT
EWY
EWZ
FXI
GDX
GLD
IBB
ILF
IWM
IYR
MOO
OIH
PPH
PSQ
QQQQ
RWM
SH
SLV
SPY
TLT
UNG
USO
VNQ
VTI
XLB
XLE
XLF
XLI
XLK
XLP
XLU
XLV
SMH
XLY