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ETF Rotation Strategies
Own Mountain Trading Company 2012 1
Jackie Ann Patterson
Editor, BackTesting Report
Required Disclaimers
Trading involves risk of loss and may not be suitable for everyone.
The author actively trades stocks and ETFs. She may or may not hold a position
in any instrument discussed.
This presentation is for educational purposes and is not a recommendation to buy
or sell securities.
HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE
AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL
TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE
UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH
AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO
THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS
BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR
TO THOSE SHOWN.
The computer engineer who back-tests
trading strategies and indicators
Im Jackie Ann Patterson
Editor of BackTesting Report
Shout Out to Fidelity Investments
Funded my back-testing research that became the basis for this presentation
Published article at https://guidance.fidelity.com/viewpoints/buy-and-hold-sector-rotation
Disclosure: Independent contractor for Fidelity
https://guidance.fidelity.com/viewpoints/buy-and-hold-sector-rotationhttps://guidance.fidelity.com/viewpoints/buy-and-hold-sector-rotationhttps://guidance.fidelity.com/viewpoints/buy-and-hold-sector-rotationhttps://guidance.fidelity.com/viewpoints/buy-and-hold-sector-rotationhttps://guidance.fidelity.com/viewpoints/buy-and-hold-sector-rotationhttps://guidance.fidelity.com/viewpoints/buy-and-hold-sector-rotationhttps://guidance.fidelity.com/viewpoints/buy-and-hold-sector-rotationhttps://guidance.fidelity.com/viewpoints/buy-and-hold-sector-rotationhttps://guidance.fidelity.com/viewpoints/buy-and-hold-sector-rotationhttps://guidance.fidelity.com/viewpoints/buy-and-hold-sector-rotationhttps://guidance.fidelity.com/viewpoints/buy-and-hold-sector-rotationhttps://guidance.fidelity.com/viewpoints/buy-and-hold-sector-rotation
Sector Rotation: How to Get Respectable Gains with Low Overhead
What does THAT mean?
System Design Decisions
Timeframes
Applicable Markets
Types of Rotation
Selection Criteria
Example Sector Rotation Trading Plan
5
Sector Rotation Definitions
GOAL: Get in areas of market poised to
deliver best performance
NOT: intra-day trading
NOT: Buy and Hold
6
Respectable Gains > 10% annually
7
Minimal Overhead
Limited time / effort
Limited / no commissions
Limited / no taxes
(in IRA, see your accountant)
8
Note Differences
9
Manage Risk
Historical drawdowns
Stop loss
10
System Design Decisions
Timeframe
Applicable Markets
Types of Rotation
Selection Criteria
BackTesting Report 2012 11
System Design Decisions
Timeframe
Applicable Markets
Types of Rotation
Selection Criteria
BackTesting Report 2012 12
Time Frame: Monthly or Daily
From BackTesting with Wealth Lab Pro:
RSI Rotations worked better DAILY
RoC Rotations worked better MONTHLY
WEEKLY rotation might have merit
Personally, I like to work 1 day per month
13
Wealth Lab Pro is a registered trademark of FMC, LLC.
System Design Decisions
Timeframe
Applicable Markets
Types of Rotation
Selection Criteria
BackTesting Report 2012 14
Markets Tested
SPDR Sector ETFs
XLB, XLE, XLF, XLI, XLK, XLP, XLU, XLV, XLY
iShares ETFs, including
Styles (e.g. small cap growth to large cap value)
Fixed Income
International
Stocks, e.g. Dow 30
15
SPDR is a registered trademark of S&P Financial Services, LLC. iShares is a registered trademark of Blackrock.
http://personal.fidelity.com/products/trading/What_You_Can_Trade/WYCT_ETFs_Category.shtml
Markets Tested
SPDR Sector ETFs
XLB, XLE, XLF, XLI, XLK, XLP, XLU, XLV, XLY
iShares ETFs, including
Styles (e.g. small cap growth to large cap value)
Fixed Income
International
Stocks, e.g. Dow 30
16
SPDR is a registered trademark of S&P Financial Services, LLC. iShares is a registered trademark of Blackrock.
http://personal.fidelity.com/products/trading/What_You_Can_Trade/WYCT_ETFs_Category.shtml
System Design Decisions
Timeframe
Applicable Markets
Types of Rotation
Selection Criteria
BackTesting Report 2012 17
Types of Rotation
Follow Economic Cycle thru sector ETFs
http://stockcharts.com/freecharts/perf.html?%5bSE
CT%5b
Source: Sam Stovalls Chart on StockCharts.com
18
http://stockcharts.com/freecharts/perf.html?[SECT[http://stockcharts.com/freecharts/perf.html?[SECT[
Types of Rotation
Select beaten-down bargain ETFs
19
Types of Rotation
Select ETFs with highest momentum
20
System Design Decisions
Timeframe
Applicable Markets
Types of Rotation
Selection Criteria
BackTesting Report 2012 21
Selection Criteria
K.I.S.S.
Rank-able and continuously available
Able to back-test
RSI vs.. RoC
Dividends for Dogs of Dow
22
Original Back-tests on Wealth-Lab Pro for 2001 - 2011
S&P Sectors lagged in almost every test
iShares High RoC rocked!
Dow Stocks with low RSI more
consistent due to daily trades
Long/Short didnt help
23 Wealth Lab Pro is a registered trademark of FMC, LLC.
Buy and Hold Baseline
24
Buy & Hold
Comparison for
12/31/2001 -
12/31/2011
SPDRs: 9
Select Sector
ETFs
iShares All
30 Fidelity
Commission-
Free ETFs
Dow - Equal
Weight of 30
Stocks
S&P500 (IVV
iShares ETF
tracking
fund)
Starting Capital $100,000 $100,000 $100,000 $100,000
Net Profit $60,029 $52,798 $62,063 $30,430
Net Profit % 60.0% 52.8% 62.1% 30.4%
Annualized Gain 4.8% 4.3% 5.0% 2.7%
Total Commission ($72) ($231) ($239) ($8)
Dividends Received $23,684 $21,456 $27,565 $20,377
Number of Trades 9 29 30 1
Win Rate 88.9% 82.8% 60.0% 100.0%
Maximum Drawdown ($84,414) ($79,755) ($76,261) ($78,159)
Sharpe Ratio 0.39 0.38 0.40 0.25
Source: Wealth Lab Pro portfolio simulation for 2001-2011
1st Pass Performance Stats
25
Backtest 2001-2011 SPDR Sectors
14-Day RSI iShares High
30- day RoC Dow 30
14-Day RSI
Selection and Sizing 3 lowest, 33.3%
each 3 highest,
33.3% each 3 lowest, 33.3%
each Starting Capital $100,000 $100,000 $100,000
Net Profit $122,130 $222,150 $245,147 Net Profit % 122% 222% 245%
Annualized Gain 8% 12% 13% Total Commission ($22,220) $0 ($32,126)
Dividends Received $32,258 $43,202 $39,059
Number of Trades 1,399 162 2,022
Average Bars Held 6.34 46.5 4.69
Win Rate 59% 62% 61%
Maximum Drawdown ($88,087) ($67,605) ($153,644)
Sharpe Ratio 0.55 0.89 0.66
Source: Wealth Lab Pro portfolio simulation for 2001-2011
Long / Short Not Helpful
26
Long / Short on 30-Day RoC
SPDR
Sectors
RoC (L/S) iShares RoC
(L/S) Dow 30 (L/S)
Selection and Sizing for 2
Long and 1 Short 45% each,
1.5 margin 45% each, 1.5
margin 45% each, 1.5
margin Starting Capital $100,000 $100,000 $100,000
Net Profit ($153) $128,881 ($25,396) Net Profit % 0% 129% -25%
Annualized Gain 0% 9% -3% Total Commission ($2,759) $0 ($3,156)
Dividends Received $8,498 $11,753 $10,969
Number of Trades 175 183 200
Average Bars Held 43.12 41.28 37.86
Win Rate 50% 51% 48%
Maximum Drawdown ($35,207) ($42,615) ($82,881)
Sharpe Ratio 0.07 0.72 -0.02
Source: Wealth Lab Pro portfolio simulation for 2001-2011
Dow 30 Survivorship Bias C and AIG Dropped from Index
27
Ideal Dow Now Real Dow with C, AIG
Starting Capital $100,000.00 $100,000.00
Net Profit $394,824.70 $143,848.00
Net Profit % 394.82% 143.85%
Annualized Gain 17.35% 9.33% Total Commission ($32,666.55) ($31,823.85)
Dividends Received $46,728.26 $30,874.34
Number of Trades 2,056 2,003
Average Bars Held 4.63 4.73
Win Rate 60.60% 58.06%
Maximum Drawdown ($124,441.49) ($107,296.36)
Sharpe Ratio 0.89 0.47
Source: Wealth Lab Pro portfolio simulation for 2001-2011
30-Day RoC Not Resilient iShares High RoC Varying Start Dates
28
Source: Wealth Lab Pro portfolio simulation for 2001-2011
Optimizing RoC and Stop Loss For Free iShares Rotation
29
Source: Wealth Lab Pro portfolio simulation for 2001-2011
RoC Look-Back Period vs. Profit iShares Hig
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