Amazon! ETF Rotation - Back Test Results the Easy Way · Hold 2 funds Back-test with mutual funds ... ETF Rotation Plan

Truth About

ETF Rotation

© Own Mountain Trading Company 2012 1

Jackie Ann Patterson

Editor, BackTesting Report

[email protected]

Now on

Amazon!

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 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.

© Own Mountain Trading Company 2012

The computer engineer who back-tests

trading strategies and indicators

I’m Jackie Ann Patterson –

Editor of BackTesting Report

Goals: Show You…

How to Get Respectable Gains

with Low Overhead

How you could have doubled your money

in 2004 – 2009

How to run a simple ETF Rotation

4 © Own Mountain Trading Company 2012

Agenda

Compare 2 portfolio strategies

Diversified Buy and Hold

Rotation

Demo Rotation with High Volume ETFs


Shout Out to Fidelity Investments

Funded a round of back-testing research on sector rotation

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-rotation












Lessons From Back-tests on Wealth-Lab Pro® for 2002 - 2011

S&P Sectors lagged iShares Styles

Momentum beat Bargain-Hunting

30-day look-back too volatile

30 iShares ETFs trade commission-free at

Fidelity

S&P500 easy to beat after 2000

7

Wealth Lab Pro is a registered trademark of FMC, LLC.

Its All Relative A Baseline for Comparison

Diversified Portfolio

Buy and Hold, rebalancing annually

Least overhead

Use mutual funds for longer track record

than ETFs


The Funds


Portfolio Mix Exploration

CAGR Curve

10

5.8%

6.0%

6.2%

6.4%

6.6%

6.8%

7.0%

90% 80% 70% 60% 50% 40% 30% 20% 10%

% of Account Invested in Stock vs Bonds

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Hypothetical. Source: Jackie Ann Patterson portfolio simulation with Excel

Portfolio Mix Exploration

Average Annual Return

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0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

90% 80% 70% 60% 50% 40% 30% 20% 10%


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Max Drawdown Deeper with

More Stocks Than Bonds

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-60%

-50%

-40%

-30%

-20%

-10%

0%

90% 80% 70% 60% 50% 40% 30% 20% 10%


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Sharpe Ratio Increases as

Stock Decreases

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0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

90% 80% 70% 60% 50% 40% 30% 20% 10%


Sharpe Ratio (2.8% risk-free rate)

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Reference Portfolio Allocation 50% Stocks, 50% Bonds


Portfolio Rotation Definitions

GOAL: Get in areas of market poised to

deliver best performance

NOT: intra-day trading

NOT: Buy and Hold


Relative Strength Selection Historically Proven Criterion

Rotate to ETFs with highest percentage gains

Use Total Returns, including dividends

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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 yearly 17


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 luck


Best Look-back: 140 trading days

Mutual Funds: 12% CAGR, -35% DD

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CAGR

DD %


-50%

-45%

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20

40

60

80

100

120

140

160

180

200

22

0

240

260

280

300

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Add Long Bonds and Short Fund For Better Performance

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Rotate to Cash Too When All Funds Going Down

Reduced Drawdowns

Before buying, check that 140-day rate-

of-change (RoC) is positive

Buy top funds with positive RoC

Sit in cash if RoC not positive

21


ETF Rotation Equity Curves


Forward-Testing Live trading in my small IRA account

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$45,500

$46,000

$46,500

$47,000

$47,500

$48,000

$48,500

$49,000

$49,500

$50,000


Final Funds

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My Forward-Testing Rotation Tools

at TruthaboutETFrotation.com


What It Takes to Succeed With

ETF Rotation Plan

Simple numeric comparison

1 hour per week

A little bit of self-discipline

Show up for that hour per week

Don’t mess with positions otherwise

Willingness to sell holdings on cue

Market cooperation


Turn in Surveys for Drawing for

truthaboutmacd.com Video Series

Thank You! For more information see…

divergence-alerts.com TruthaboutETFrotation.com

Get the book at Amazon.com

29

jackiep@back

testingreport.

com


Appendix


ETF Options Rotation Manually Back-Tested Two+ Ways

Covered Calls

+3 ATR OTM strike

Calls as Leveraged Position

Deep ITM

Basic: Same number of shares with less $$

Aggressive: Risk 15% of account on each position

Basic rotation strategy of

iShares Style ETFs with Top 2 70-day RoC

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Options Difficulties

Thinly traded

Huge bid/ask spread

Sometimes no bid to sell covered calls

Sometimes no options for underlying ETF

Historical data spotty

Options not trading on all ETFs

Particularly on the leading ETFs after 2009


1st Effort = FAIL

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$-

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

ETFs Only

Options

Aggressive Options

Covered Calls

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Documents

Amazon! ETF Rotation - Back Test Results the Easy Way · Hold 2 funds Back-test with mutual funds ... ETF Rotation Plan