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Running with Momentum: Momentum ETF Portfolio
Steve Turner Burlington Stock Trading Systems Meetup October 19 2016
Disclaimer
The content in this presentation is for educational and illustrative purposes only and does not constitute either investment advice or buy/sell recommendations. I am not a licensed investment advisor and make no recommendation either to purchase or sell any particular stock, bond, option or security of any kind. Trading in the stock market involves a high degree of risk and you may incur financial losses if you engage in such activity.
Credits
1. Bob Turnbull’s à U.S. 2&5 SMA portfolio 2. Tom Cauley’s à U.S. Midas ETFs portfolio 3. Arthur Hill article à Momentum System for Trading
Asset Classes 4. Petra Hess’ suggestion à “Create a portfolio with based on
the top performing ETFs”
My Situation
I want to make money I work full time
I want above average returns
with minimal work required
during working hours
Guiding Principles
1. I will make money in up and down markets. 2. I will make more money in up markets than in down markets. 3. Generally, securities that are “running” tend to keep running. 4. If something is running – up or down – I want “a piece” of it. 5. It’s okay to step aside (be in cash) if – and only if - nothing is
running. 6. I will not catch the exact bottom or the exact top. I’m very
content with capturing the “meat” in the middle. 7. I make more money when I trade less.
Portfolio Objectives
1. In up markets, to beat the return on the TSX
2. In down markets, to achieve a positive return
3. Minimal and easy trades § Minimal à very few trades § Easy à high ADV and low bid/ask spreads
Overall Approach
What to buy: § Momentum ETF watch list
When to buy: § Buy when each of the momentum ETFs are
amoung the best performing (relative performance to one another)
§ Sell when they are no longer the best performing
Overall Approach
Hop off Old Nelly
Start riding Secretariat!!!
Momentum ETF Watch List 1. Canadian ETFs only 2. Price > $5 3. ADV > 30k-40k+ (generally) 4. Diversified:
§ Markets § Sectors § Capital gain vs. income oriented § Volatility § Inverse / contra
5. Minimal overlap 6. The watch list must be kept to a manageable size (more isn’t
better)
Momentum ETF Watch List BroadMarket CanadaLargeCap(TSX60) XIU
CanadaSmallCap XCSS&P500 XSPRussell2000 XSU
Sector Gold XGDEnergy XEGFinancials XFNJuniorGold ZJG
EquityIncome PreferredShares ZPRDividends XDVCoveredCallBanks ZWBCoveredCallUnRliRes ZWUREIT XREMonthlyIncome XTR
VoliRlity InverseVIX HVIVIX HUV
Inverse TSX60 HIXS&P500 HIU
Performwellingenerallyrisingmarkets
Performwellingenerallyfallingmarkets
Top Momentum ETFs (Up-Market)
Up-market: § Buy the top 5 performing ETFs as measured by:
§ RT (10 day SMA) > 1.1 § Sort using top RT (10 day SMA)
RT and RT (10SMA) - XIU
RT and RT (10SMA) - ZJG
Down-Market: 1. Buy long positions in down-market ETFs (HIX, HIU, HUV) if:
§ There are less than 5 up-market ETFs that qualify AND § RT (10SMA) > 1.0 for the down-market ETFs
2. Sell when either: § Any regular up-market ETF buy conditions are meet (have a
bias to an upward trending market) OR § RT (10SMA) reverses by more then 0.05
3. Can have a mix of up and down-market ETFs 4. Down-market ETFs can be 100% of portfolio *** Caution: This scenario has not been fully tested yet ***
Top Momentum ETFs (Down-Market)
RT and RT (10SMA) For HIX
Back Test
§ $100,000 portfolio § $9.99 commission § All trades at close on Friday § February 19 (DEW up) to September 28 § 100% manual back test
ETF Momentum Tracking Sheet 19-Feb 26-Feb 04-Mar 11-Mar 18-Mar 25-Mar 01-Apr 08-Apr 15-Apr 22-Apr 29-Apr 06-May 13-May 20-May 27-May 03-Jun
HIU 2HIXHUV 4 3HVI 3 3 3 3 3 4 4 4 5 5XCS 1 2 3 3 2 2 1 2 2 1 1 2 2 2 3 2XDVXEG 2 3 3 2 1 1 2 2 1 1 1 2 3XFNXGD 5 5 5 4 4 5 4 4 4 4 4 3 3 3 1 1XIUXRE 2 1 1 1XSPXSUXTRZJG 3 4 4 5 5 4 5 5 5 5 5 5 5 5 4 4ZPRZWBZWU 1 1#TRADES 5 1 1 1 1
ETF Momentum Tracking Sheet
19-Feb 26-Feb 04-Mar 11-Mar 18-Mar 25-Mar 01-Apr 08-Apr 15-Apr 22-Apr 29-Apr 06-May 13-May 20-May 27-May 03-Jun 10-Jun 17-Jun 24-Jun 01-Jul 08-Jul 15-Jul 22-Jul 29-Jul 05-Aug 12-Aug 19-Aug 26-Aug 02-Sep 09-Sep 16-Sep 23-SepHIU 2HIXHUV 4 3HVI 3 3 3 3 3 4 4 4 5 5 4 3 3 4 4 5 5 5 5 5 5XCS 1 2 3 3 2 2 1 2 2 1 1 2 2 2 3 2 2 3 3 3 3 3 2 2 2 2 2 1XDVXEG 2 3 3 2 1 1 2 2 1 1 1 2 3 1 2 2 2 1 1 1 3 2XFN 1 1 3XGD 5 5 5 4 4 5 4 4 4 4 4 3 3 3 1 1 3 4 4 4 4 4 4 4 3 3 3 3XIUXRE 2 1 1 1 1 1 1 2 2XSP 2 3 3 2XSU 1 1 1 1 1 2 4 4 4 4XTRZJG 3 4 4 5 5 4 5 5 5 5 5 5 5 5 4 4 5 5 5 5 5 5 5 5 5 5 4 4 2ZPRZWB 1ZWU 1 1#TRADES 5 1 1 1 1 1 2 1 2 2 2
Summary of Trades
Count = The number of weeks in which a given ETF was held (out of 32) Sum = The total score for the ETF during the test period (cumulative weekly score)
Results As Of September 30
Trades: § Only 11 of 32 weeks had trades § 19 trades (5 initial plus 14 switches) § $330 in commissions
Returns: § 12 winning trades / 7 losers (63%) § 33% return (versus 15% on TSX) § 11% maximum drawdown
Equity Curve
Routines
Daily: 1. None Weekly (15 minutes): 1. Identify top 5 ETFs in VectorVest 2. Update momentum ETF tracking sheet 3. Execute trades as required Quarterly (60 minutes): § Review and update watch list
Potential Enhancements
Watch List: 1. Use different sector or market ETFs 2. Include leveraged ETFs 3. Use stocks instead of ETFs 4. Remove ETFs that are likely not going to be selected 5. Include commodity ETFs
Potential Enhancements
Selecting The Top Momentum ETFs: 1. Pick fewer ETFs (vs. 5) 2. Apply more weight for the top ranked ETFs (vs. 5x20%) 3. Change the RT smoothing (vs. 10 SMA) 4. Adjust the minimum RT (vs. 1.1 up / 1.0 down) 5. Top 5 ETFs by 10-day rate of change 6. High or rising RT (vs. current is just high RT) 7. Ignore small variances in the RT (10SMA)
Strategies for Starting this Portfolio
1. Jump in: § Purchase full portfolio of qualifying ETFs
2. Wade in: § Buy part positions in each of the qualifying ETFs § Buy full positions on a few of the qualifying ETFs
3. Dip your toe in: § Buy new positions only as they meet the buy criteria
Starting A Portfolio On Friday Sept 30, 2016
$20,000 in each of: § HVI – Inverse volatility S&P500 § XSU – Russell 2000 § XFN – Canadian financials § ZWB – Canada banks with covered calls § XIU – Canada large caps
HVI
XSU
XFN
ZWB
XIU
Final Thoughts
1. I don’t expect the current pace of returns will continue 2. I fully expect that this strategy will work better in the U.S. 3. I expect that this approach will:
§ Work very well in up markets § Work well (but not as well) in down markets § Not perform well during:
§ The transition from up to down markets (and vice versa) § Flat/consolidating markets § During periods of sector rotation
Final Thoughts
Running
Consolidating
Transitioning
Final Thoughts
19-Feb 26-Feb 04-Mar 11-Mar 18-Mar 25-Mar 01-Apr 08-Apr 15-Apr 22-Apr 29-Apr 06-May 13-May 20-May 27-May 03-Jun 10-Jun 17-Jun 24-Jun 01-Jul 08-Jul 15-Jul 22-Jul 29-Jul 05-Aug 12-Aug 19-Aug 26-Aug 02-Sep 09-Sep 16-Sep 23-SepHIU 2HIXHUV 4 3HVI 3 3 3 3 3 4 4 4 5 5 4 3 3 4 4 5 5 5 5 5 5XCS 1 2 3 3 2 2 1 2 2 1 1 2 2 2 3 2 2 3 3 3 3 3 2 2 2 2 2 1XDVXEG 2 3 3 2 1 1 2 2 1 1 1 2 3 1 2 2 2 1 1 1 3 2XFN 1 1 3XGD 5 5 5 4 4 5 4 4 4 4 4 3 3 3 1 1 3 4 4 4 4 4 4 4 3 3 3 3XIUXRE 2 1 1 1 1 1 1 2 2XSP 2 3 3 2XSU 1 1 1 1 1 2 4 4 4 4XTRZJG 3 4 4 5 5 4 5 5 5 5 5 5 5 5 4 4 5 5 5 5 5 5 5 5 5 5 4 4 2ZPRZWB 1ZWU 1 1#TRADES 5 1 1 1 1 1 2 1 2 2 2
Final Thoughts
Feb 19 – April 1
(6 weeks)
Apr 1 – Aug 15
(19 weeks)
Aug 15 – Sept 30
(7 weeks)
Qualifying ETFs* 7 15 6
Average of 5 Top SMA10 RT 1.36 1.44 1.21
Switches 4 3 7
Return 0% 40% -6% * As of February 19, May 15, September 30
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