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ETF Rotation StrategiesJackie Ann PattersonEditor, BackTesting Report Own Mountain Trading Company 20121
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 positionin any instrument discussed. This presentation is for educational purposes and is not a recommendation to buyor sell securities. HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKEAN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUALTRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVEUNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCHAS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TOTHE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION ISBEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILARTO THOSE SHOWN.
Survey / Prize Drawing Please complete survey to be entered indrawing Fill in email address legibly Check YES or NO to receive more info ETF Rotation Forward-Testing Spreadsheet Slides3
I’m Jackie Ann Patterson –Editor of BackTesting ReportThe computer engineer who back-teststrading strategies and indicators
Goals: Show You Howto Get Respectable Gainswith Low Overhead Howyou could have doubled your moneyin 2005 – 2009 Howto run a simple ETF Rotation5
Agenda Compare 2 portfolio strategies Diversified Buy and Hold Rotation Demo Rotation with High Volume ETFs6
Shout Out to Fidelity Investments Funded my initial back-testing researchon sector rotation Published article -hold-sector-rotation Disclosure: Independent contractor forFidelity
Lessons From Back-tests onWealth-Lab Pro for 2002 - 2011 S&P Sectors lagged iShares Styles Momentum beat Bargain-Hunting 30-day look-back too volatile Long/Short didn’t help 30 iShares ETFs trade commission-free atFidelity S&P500 easy to beat after 2000Wealth Lab Pro is a registered trademark of FMC, LLC.8
Its All RelativeA Baseline for Comparison Diversified Portfolio Buy and Hold, rebalancing annually Least overhead Use mutual funds for longer track recordthan ETFs9
Diversified PortfolioFor Fifty-SomethingsTickerIndexPercentAllocated% ForHomeownersVFINXS&P 500 US Large-Cap13.8%16.7%VMBFX Barclays Aggregate USBond27.5%33.3%NAESXMSCI US Small-Cap 175013.8%16.7%VEIEXMSCI Emerging Markets13.8%16.7%VGTSXMSCI All Country Worldex-USA13.8%16.7%FRESXFidelity Real Estate Mutual 12.5%FundHouseCashCash6 MonthsExpenses4.8%Based on A Random Walk Down Wall St by Burton G. Malkiel10
Total Returns of Buy ‘n’ Hold ofComplete Diversified, Rebalanced PortfolioMetric2005 - 20112002 – 20111998 – 2011CAGR6.1%-44%7.8%-44%6.9%-44%Avg Annual Return6.8%8.4%7.5%Standard Dev15.8%15.6%13.8%Monthly Excess0.28%0.37%0.24%Max Drawdown %By Mar 9, 2009Return Over 3-MonthTreasuriesHypothetical. Source: Jackie Ann Patterson portfolio simulation with Excel11
Homeowners Diversified PortfolioBuy ‘n’ Hold ‘n’ Rebalance Total ReturnsMetric2005 - 20112002 – 20111998 – 2011CAGR6.3%-41%7.6%-41%6.8%-41%Avg Annual Return6.9%8.2%7.4%Standard Dev16.0%15.8%14.6%Monthly Excess0.23%0.32%0.20%Max Drawdown %By Mar 9, 2009Return Over 3-MonthTreasuriesHypothetical. Source: Jackie Ann Patterson portfolio simulation with Excel12
Portfolio Rotation Definitions GOAL: Get in areas of market poised todeliver best performance NOT: intra-day trading NOT: Buy and Hold13
Relative Strength SelectionHistorically Proven CriterionRotate to ETFs with highest percentage gains Use Total Returns, including dividends 14
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 yearly15
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 luck16
Best Look-back: 160 DaysMutual Funds: 14% CAGR, -34% 55%DD %* Hypothetical. Source: Jackie Ann Patterson portfolio simulation with Excel17
Homeowners: Best Look-back 140Mutual Funds: 12% CAGR, -35% 10%5%0%-5%-10%-15%-20%-25%-30%-35%-40%-45%-50%DD %* Hypothetical. Source: Jackie Ann Patterson portfolio simulation with Excel18
ETF Diversified Portfolio to RotateFor Fifty-SomethingsTickerIndexPercentAllocated% ForHomeownersSPYS&P 500 US Large-Cap13.8%16.7%AGGBarclays Aggregate USBond27.5%33.3%IWMRussell 2000 Small-Cap13.8%16.7%EEMMSCI Emerging Markets13.8%16.7%EFAMSCI EAFE Int’l Stocks13.8%16.7%IYRDow Jones US RealEstate Index12.5%HouseCashCash4.8%6 MonthsExpensesBased on A Random Walk Down Wall St19
“Souped-Up” ETF PortfolioFor Rotation, For NowTickerIndexSPYS&P 500 US Large-CapAGGBarclays Aggregate USBondIWMRussell 2000 Small-CapEEMMSCI Emerging MarketsEFAMSCI EAFE Int’l StocksTLT20 year US TreasuryBond Want more bond fundchoices now whileyounger boomers movingto more conservativeportfolios Maybe not so excitedabout bonds whenbubble bursts20
ETF Rotation ResultsETFs Allow Weekly Trading, Mutual Funds Do NotMetricETFs, 160look-back2005 2011HomeownerETFs, 140look-back2005 - 2011HomeOwner TLT, 140 Lookback2005-2011ETFs TLT,160 %-21%Avg AnnualReturn9.5%9.15%14.7%10.5%Standard Dev13.3%14.4%8.77%7.8%MonthlyExcess Return0.33% 0.24%0.59%0.31%Max DrawdownBy Mar 9, 2009Over 3-MonthTreasuries* Hypothetical. Source: Jackie Ann Patterson portfolio simulation with Excel21
Total Returns by YearIncludes DividendsYear2005200620072008200920102011Best ETF TRotation20%20%18%20%16%-6%16%DiversifiedFunds 13%1%22
ETF Rotation Equity Curves 30,000 25,000 20,000 15,000 10,000 5,000HETF THETFETFH-DiverseDiverseSPY -23
My Forward-Testing Rotation Tools24
What It Takes to Succeed WithETF Rotation PlanSimple numeric comparison 1 hour per week A little bit of self-discipline Show up for that hour per week Don’t mess with positions otherwiseWillingness to sell holdings on cue Market cooperation 25
Survey / Prize Drawing Please complete survey to be entered indrawing Fill in email address legibly Check YES or NO to receive more info ETF Rotation Forward-Testing Spreadsheet Slides26
Thank You!For more information see divergence-alerts.com/moneyshow Attend tomorrow’s session Nine Essentials of Market Analysis 11:35 am - 12:20 pmjackiep@backtestingreport.com27
ETF Rotation Results ETFs Allow Weekly Trading, Mutual Funds Do Not 21 Metric ETFs, 160 look-back 2005 - 2011 Homeowner ETFs, 140 look-back 2005 - 2011 HomeOwner TLT, 140 Look-back 2005-2011 ETFs TLT, 160 Look-back 2005-2011 CAGR 9.5% 9.4% 15.1% 10.9% Max Draw
