Reduce Drawdowns And Increase Your Portfolio Sharpe Ratio

The QuantShares U.S. Market Neutral Anti-Beta ETF (NYSEARCA:BTAL) provides a unique strategy that captures the spread in performance between low beta stocks and high beta stocks in a convenient investor-friendly ETF wrapper…

Read: BTAL: Reduce Drawdowns And Increase Your Portfolio Sharpe Ratio at Seeking Alpha.

Steve

Great post Steve. Could you do custom hedging with this using the EVAL function in a buy rule?

Great post Steve. Succinct and informative, in your usual fashion.

You touched on the idea of what will happen to this etf this November, which is also my concern. Its five years of history with minimal assets does not fare well for its continued existence unless we have a nasty correction during this time period and it outperforms (then the performance chasers will load up on it).

Scott

So yes you could devise some scheme to switch in BTAL in an ETF port. The main problem is that we can’t control the weight of individual holdings.

Steve

Steve,
I am not surprised that they have only $7-million in the ETF BTAL. From 9/13/2011 to now the fund lost about 20%. Compare this to the market neutral Vanguard fund VMNFX which gained 19% over the same period. So your strategy would work better with VMNFX if you can afford the $250,000 minimum investment required.

You could also just use an eval switch based on market conditions to avoid high beta stocks. Wonder how well that would work.

I’ll keep that in mind Geov.:slight_smile:

The point of holding BTAL is that it outperforms during a bear market. Without doing a backtest, I’m not sure that VMNFX will work better, as it had a pretty good drop in 2008 and hasn’t recovered from 2007 prices yet. It isn’t a hedge.

The criteria for popularity isn’t based on profits. VXX for example is a big money loser but has high AUM. I think the question is whether investors understand the product and find it useful.

Steve

I still haven’t found any hedge better than intermediate treasuries (IEF and or IEI depending on how much duration risk you want to assume). Currently my overall portfolio is 65% equities and 35% ( IEF and IEI 50/50 split).

How can you be so sure about this. There has been no bear market since inception of BTAL.

I think that if you study the structure of BTAL, equal-weighted on a sector-by-sector basis, with long low beta / short high beta, that yes in deed, it will perform better during a bear market, as it has during recent corrections.

Take care
Steve

Very interesting article Steve. Thanks.

BTAL is supposed to track the Dow Jones Thematic Market Neutral Anti-Beta Total Return Index. See:

http://www.djindexes.com/thematicmarketneutral/

The Bloomberg symbol is DJTMNABT. Bloomberg has data back to 12/31/01 on the total return index. Here are some bear market periods:

12/31/01 to 10/9/02 = index up 70%

10/9/07 to 11/21/08 = index up 66%

4/23/10 to 7/2/10 = index up 16%

5/2/11 to 10/3/11 = index up 27%

This assumes reinvested dividends.

However, BTAL doesn’t track the index particularly well. Averages more than -2% difference annually, and at times can be greater.