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Tuesday, February 16, 2016

ETF Momentum Rotation Systems - 2015 Results

In the ETF Rotation Systems to Beat the Markets series, written more than a year ago, we discussed the idea behind this dynamic, and yet fairly laid back way of investing, which evidence suggests is superior to simply following an index (Mebane Faber's work, back-testing some of these principles over a century of data is a good starting point). Now that 2015 is in the rear-view mirror, I thought it was a good time to see how these systems performed last year. I went ahead and bought a one-month membership over at ETFReplay.com to run the tests. One day, I will have time in my life to automate it all with an Excel spreadsheet.

The necessary disclaimer before hand: as I have mentioned before I personally do not have money invested in any of these systems as I have finite amounts of it. It is currently deployed in Forex, Options, Long term stock holdings. Over the last year, especially after the move to the US, I have been aggressively saving to purchase a house with a good down-payment, so I haven't deployed capital on these ETF Rotation systems. That being said, I think they are an interesting idea and I'm convinced that, in the long run, they are better than following an index.


So how did the systems perform in 2015?
It was not a good year. This is bound to happen when the market moves violently in different directions and changes quickly. Remember, with ETF Rotations you are constantly chasing recent momentum. If the equity portion of the system falls (S&P500 having a bad month), the system will abandon the position the next month to allocate the capital somewhere else. If there is a strong rally in equities right after that, the system misses the opportunity to participate in it, as it got out earlier. This principle will obviously cause for the systems to miss some portions of the rallies, but also avoid the major market crashes. So, in the long run, it should work in its favor. 2015 in particular had this quick succession of violent both down and upside moves, negatively impacting the result of the rotations.

Let's remember SPY returned +1.3% in 2015 and let's keep that number in mind as our benchmark. This number includes, of course, dividends. Without the dividends it was actually a negative year. Most investors and Managers under-perform the Index. 


Results:

1-American Equities
Symbols: XLB, XLE, XLF, XLI, XLK, XLP, XLU, XLV, XLY
2015 Return: -8.6% (Investing in the 3 best symbols each month and applying moving avg filter for cash position)

Updated All-Time statistics*:
$$$
Symbols: EEM, EPP, IEV, ILF, MDY
2015 Return: -10% (Investing in the 2 best symbols each month and applying moving avg filter for cash position)

Updated All-Time statistics*:

$$$

3-American Equities + TLT + GLD + IYR + EEM
Symbols: XLB, XLE, XLF, XLI, XLK, XLP, XLU, XLV, XLY, TLT, GLD, IYR, EEM
2015 Return: -10.15% (Investing in the 3 best symbols each month and applying moving avg filter for cash position)

Updated All-Time statistics*:

$$$

4-SPY + EFA + IEF + GLD + ICF
2015 Return: +2.5% (Investing in the 2 best symbols each month and applying moving avg filter for cash position)

Updated All-Time statistics*:

$$$

5-SPY + IWM + EEM + EFA + TLT + TLH + DBC + GLD + ICF + RWX 
2015 Return: -13.7% without cash position and -3.3% when applying the filter for moving to cash positions.

Updated All-Time statistics*:

$$$


I also want to include an additional system, which I never got to talk about as I thought the point had been illustrated enough in the original series, but which showed interesting results in the back-tests. This system had a positive 2015, and just like system number 4, it now owns a track record without a single negative year:

SPY + EFA + IEF + GLD + ICF + DBC
2015 Return: +1.9% (Investing in the 2 best symbols each month and applying moving avg filter for cash position)

All time statistics*:



* The starting point is not the same for all back-tests. It depends on the inception date of the ETFs included in the respective system.

Conclusion
Obviously not a good year, but ETF Rotation feels to me more like investing, rather than active trading. Therefore, it should be looked at as a long term approach. Multi-asset based rotation systems truly shine the year there is a major crash in the equity markets, which through their filters they avoid. The only way these systems permanently fail, is if we have very choppy-side-way markets in all asset classes at the same time indefinitely, and no more significant multi-month up-trends ever develop again. I guess that's very unlikely. 

Although 2015 was not a good year, it was not terrible either. I only seriously look at the last three systems, because of their asset class diversification. A rotation system with one asset class only, defeats the purpose of rotations itself. The first two systems are concentrated in equities only, so I pretty much ignore them, and the third one may have a lot of turn over given the large selection of symbols. These systems were included at the beginning of the series for education purposes only, but they are not my first choice.

We'll see what the future holds. For now, I will keep paying that membership every January and posting updates for my beloved readers.

LT


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