Well its time to take a look at how this thing actually performs.
But if you are new to this series, you might want to take a look at Part 1.
To recap:
System Specifics
The system will calculate the momentum/strength of each ETF in the portfolio, and then based on that metric, rank the ETFs. Version V1.0 will use RSI as the proxy for momentum.
- The top 4 highest ranked ETFs will be bought on the next open after the signal to rotate.
- Each ETF will be held for a minimum number of trading days.
- At the end of the minimum hold time, the ETF portfolio will be ranked and re-balanced, with all sells taking place at the close.
Version 1.0 will be using only 2 factors, which are RSI(65) and the minimum number of trading days to hold the ETFs, which is also 65. Again, review Part 1 to see why those inputs were chosen.
The Results:
Summary
SPY has a compound annual rate of 5.34% over the same time period, so V1.0, once commission and slippage is accounted for, has probably not done any better than a buy-and-hold strategy.
Obviously, the system has a propensity for large drawdowns, and that issue must be addressed. That will be an easy fix/test, and not very much fun since it is so easy. Therefore, we’ll make improving V1.0 a little more challenging. What I will do for V1.1 is use two different RSI calculations, weighting both of them differently, and then summing them to get our ETF rank. Any of you who read the comments section here have probably seen Jeff Pietsch of Market Rewind fame mention this method a couple of times. Using two different period settings and weighting them should be more interesting than applying the old moving average filter to deal with the drawdowns, and will keep the system simple 2 factor model, for now.
One other thing to mention is that there were not but a few ETFs trading back in the middle 1990s. Because the system is requiring 4 ETFs, you’ll notice that some of the early trades are held for a few years, because there were simply no other ETFs to rotate in to. This issue disappears after a few years and other ETFs come on board. You can explore all this by viewing the trades, which I’ve linked to below.
View all the trades here: ETF Rotational System V1.0 All Trades
Longer term tests can be simulated with Fidelity sector and style mutual funds, many of which have a fifteen year plus history. Just a thought.
Been there, done that. Read Wood’s most recent prior blog entries.
Dave, I believe what Jeff is saying is to use the parameters of this post, i.e. the RSI65 and 65 day min. hold time, tested over the FSF portfolio. It is not a bad idea and I could make a few changes and test it in about 30 secs. I think I will…
Hi Wood, looking at the trades, one really stuck out. Buying PSQ ( a inverse ETF) on 10/24/08 was really late in it’s move, thus resulting in a loss. And this was during one of the largest bear markets of all time! Yikes!
Yeah, I saw that. That is one of the downfalls of holding something 65 days, also, if the rotate doesn’t come at the right time, you’ll rotate into something right at the peak, a la PSQ.
In the future, we’ll add a moving average filter, which should get rid of the inverse trades, to see if its better to just go to cash or to rotate into an inverse.
Wood,
Just out of curiosity, what trading/backtesting software are you programming these rotational systems in?
Hi Troy,
I use AmiBroker professional edition with Data from PremiumData.net
Both companies are fantastic to deal with and in my opinion, can’t be beat in terms of what they offer for a fair price.
Wood,
I’m sure I missed it somewhere, but forgive me as I am just a simple Marine. I looked at the file for all trades under the ETF system and it looks like there is more than one trade on, most of the time. In looking at the rules for the system, it only says to buy, and hold, the highest ranking EFT. Given that, how is it that there are several ETF’s in the portfolio at any given time?
Thanks
Jarhead, the ETF system is holding the top four ranked ETFs while the Fidelity Select Fund system is holding on the top 1 position.