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Tuesday, January 3, 2017

ETF Momentum Rotation Systems - 2016 Results

In the ETF Rotation Systems to Beat the Markets series, written more than two years 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 2016 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 just as I did in 2015 and show you the results. If you want to check out last year results you can read this article.

Disclaimer: as I have mentioned in the past, I personally do not have money invested in any of these systems.  I think they are an interesting idea to explore for those with very long time-frames.


So how did the systems perform in 2016?
Not a good year. ETF Rotations are constantly chasing recent momentum. With all the sharp V-shaped rebounds we have seen recently, all that is happening is that the systems are getting you out of equities after some declines, only to miss the immediate rebounds. ETF Rotations systems will shine during the bloody market years as they avoid the largest draw-downs. That's where they shine. But, in years like 2015 and 2016, with sharp declines followed by abrupt recoveries, under-performance is expected. This under performance is the price to pay in order to achieve smooth equity curves and avoid the catastrophes that take place in the market place every few years.




Results:

1-American Equities
Symbols: XLB, XLE, XLF, XLI, XLK, XLP, XLU, XLV, XLY
2016 Return: +4.1% (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
2016 Return: -6.2% (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
2016 Return: +6.6% (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
2016 Return: -1.2% (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 
2016 Return: +7.1% without cash position and +1.5% when applying the filter for moving to cash positions.

Updated All-Time statistics (with filter rule)*:

$$$


6-SPY + EFA + IEF + GLD + ICF + DBC
2016 Return: -4.4% (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
Rotation systems under-performed the simple buy/hold of SPY. However, they still show better historical risk-adjusted returns than simple buy/hold.

I will keep updating this experiment for a few more years.

LT

Related Articles:
ETF Momentum Rotation Systems - 2015 Results
ETF Rotation systems - ranking evaluation with Excel


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