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Whycliffes
Do you have any suggestions for ETF rotation models?

I've looked into various asset class ETF rotation models. They can frequently serve as useful hedges in a traditional stock strategy. I looked at a few here:

https://allocatesmartly.com/list-of-strategies/
https://portfoliodb.co/portfolio-screener/
https://www.turingtrader.com/portfolios/

The following are the most intriguing:

https://portfoliodb.co/portfolios/accelerating-dual-momentum/
https://portfoliodb.co/portfolios/papa-bear-portfolio/
https://portfoliodb.co/portfolios/mama-bear-portfolio/

To mitigate risk, they use momentum as an indication and invest in low-correlated asset classes. On the last trading day of the month, they make a change to the portfolio.

Then I tried to look into some of those that are publicly available on P123.

Those who perform best have a very high turnover rate or a large number of ETFs: https://www.portfolio123.com/app/opener/PTF/search

Is there anyone who have a proposal an asset class rotation portfolio that you have found to be effective?

Feb 1, 2022 1:53:03 AM       
Jrinne
Re: Do you have any suggestions for ETF rotation models?

large number of ETFs

Hi Marchus,

I rebalance an adaptive allocation model today. Showing a backtest of my model would be pure BS seeing as it is a backtest. I could debate how overfitted it is but not whether it is overfitted.

I think your observations about the number of ETFs may be a good one. Using a large number of ETFs works for 2 reasons, I think. First, it provides diversification.

But second, a strategy with too few ETFs is often "over-betting" in the Kelly Criterion sense. Another way to say the same thing is that a strategy with too few uncorrelated assets can cause too much volatility-drag. Kelly over-betting and volatility-drag are the same thing. Or more simply, in the spirit of original discussions of over-betting, even if the rest of the deck is all aces and face cards (making blackjack more likely) you should not bet all of your retirement funds on that one hand even though the odds are with you. Betting no money on that hand would be even more lame. There is a right amount to bet in order to capture the "edge" without to much volatility or "over-betting."

One way to illustrate what I am getting at is to take a portfolio of 33% each of XLU, XLV and XLP ("provided portfolio" in image). The average return (or "expected return") each month for this portfolio is less than SPY. And yet the CAGR for this portfolio is better than SPY. This it because a portfolio with less volatility, obviously, has less volatility-drag. Volatility affects returns (and not just drawdowns).

To be sure, there are better ideas that using just XLU, XLV and XLP in a portfolio. This is all just to reinforce that I think you are right in your observation that the number of ETFs makes a difference. And avoiding strategies that will put you in 100% QQQ one month, 100% GLD the next month and TLT the month after, is probably wise.

Some of the adaptive allocation models will underperform SPY just because some individual assets (like TLT) do not have returns as good as SPY. A modest amount of leverage for those underperforming assets may take care of that (no matter what strategy you end up using).

Jim

Attachment Volatility-drag.png (233255 bytes) (Download count: 157)


Great theory, "and yet it moves."
-Quote attributed to Galileo Galilei (1564-1642) gets my personal award for the best real-world use of an indirect proof or reductio ad absurdum.
`

Feb 1, 2022 5:13:04 AM       
Edit 10 times, last edit by Jrinne at Feb 1, 2022 8:11:02 AM
geov
Re: Do you have any suggestions for ETF rotation models?

Is there anyone who have a proposal an asset class rotation portfolio that you have found to be effective?

Yes, Seasonal ETF switching works well. Switch between 2 groups of 5 ETFs at the end of April and end of October. So you only have to look at this twice a year.

Summer group from end of April: TICKER("VIG,XLP,XLK,XLU,TIP")
Winter group end of October : TICKER("XLY,XLI,XLB,XLV,VBR")

Use P123 ranking system "ETF Rotation - Basic" to select fewer than all of them.
See performance for 2 holdings below from mid April 1999 and with 0.1% slippage.
CAGR= 14.8%
Max D/D= -35%
No need to fool around with volatility and other useless criteria.

https://www.portfolio123.com/embedded_port.jsp?portid=1671663

Feb 1, 2022 11:40:01 AM       
Edit 1 times, last edit by geov at Feb 1, 2022 12:06:44 PM
Jrinne
Re: Do you have any suggestions for ETF rotation models?

No need to fool around with volatility and other useless criteria.


Georg,

Seriously, Georg. You should start thinking about volatility drag with you sector SPDR designer model don't you think?

Here comes Georg with his overfit and cherry-picked models. No surprise here.

The median of your Designer Models with 2 year excess returns has excess returns of -28.91 This is with a minus. A big minus number. That is after you removed the really bad ones. I guess you had to keep a few.

If you want to sell your cherry-picked and overfit models to P123 members (and P123 wants to encourage this after has Marc left)) it is fine with me. But looking at volatility-drag would help your designer models. You should try it.

Just sayin'

Jim

Attachment Georg's average model.png (148340 bytes) (Download count: 145)


Great theory, "and yet it moves."
-Quote attributed to Galileo Galilei (1564-1642) gets my personal award for the best real-world use of an indirect proof or reductio ad absurdum.
`

Feb 1, 2022 11:58:26 AM       
Edit 9 times, last edit by Jrinne at Feb 1, 2022 12:18:09 PM
geov
Re: Do you have any suggestions for ETF rotation models?

Hi Jim,
I don't know where the overfitting is in the 10 ETF model I presented.

Perhaps you can provide some positive input instead.

Feb 1, 2022 12:17:31 PM       
Jrinne
Re: Do you have any suggestions for ETF rotation models?

Georg,

I did provide positive input: you should look at volatility drag in order to get some some decent Designer Models for P123 members.

Best,

Jim

Great theory, "and yet it moves."
-Quote attributed to Galileo Galilei (1564-1642) gets my personal award for the best real-world use of an indirect proof or reductio ad absurdum.
`

Feb 1, 2022 12:20:18 PM       
Edit 2 times, last edit by Jrinne at Feb 1, 2022 12:36:05 PM
geov
Re: Do you have any suggestions for ETF rotation models?

Hi Jim,
You can have a look at my latest ETF model on Seeking Alpha which uses six of my market timers to produce risk-on, risk-off, and risk-neutral signals.
It shows a 34% annualized return. To the best of my knowledge nobody else has come up with a market neutral signal in the context of market timing.
1,260 people have looked at this, which is a good advertisement for P123.

https://seekingalpha.com/article/4481459-im-m...-average-crossover-system

Looking forward to your negative comments.

Feb 1, 2022 12:31:11 PM       
Jrinne
Re: Do you have any suggestions for ETF rotation models?

Georg,

I get that you do not understand what cherry-picked means, or you do and you think the people you are selling your models to do not understand the term.

Either way not really something you should be bragging about exactly.

Best,

Jim

Great theory, "and yet it moves."
-Quote attributed to Galileo Galilei (1564-1642) gets my personal award for the best real-world use of an indirect proof or reductio ad absurdum.
`

Feb 1, 2022 12:37:54 PM       
Edit 5 times, last edit by Jrinne at Feb 1, 2022 12:45:10 PM
geov
Re: Do you have any suggestions for ETF rotation models?

One way to illustrate what I am getting at is to take a portfolio of 33% each of XLU, XLV and XLP ("provided portfolio" in image). The average return (or "expected return") each month for this portfolio is less than SPY. And yet the CAGR for this portfolio is better than SPY. This it because a portfolio with less volatility, obviously, has less volatility-drag. Volatility affects returns (and not just drawdowns).Jim

The reason that a portfolio of XLU, XLV and XLP provides a marginally higher return than SPY is that XLV alone outperforms SPY by a lot. This has nothing to do with volatility-drag. See the two figures below.

Jim, it would have been prudent to do this simple backtest before lecturing us about volatility drag. Others have also found that there is no rational to this. See "The Myth of Volatility Drag"
https://blogs.cfainstitute.org/investor/2018/...f-volatility-drag-part-2/
the author (also an engineer) concludes "Let’s banish “volatility drag” from our vocabularies!"

Attachment XLV.png (129509 bytes) (Download count: 141)


Attachment XLU XLV XLP combo.png (140177 bytes) (Download count: 143)


Feb 1, 2022 1:37:50 PM       
Edit 1 times, last edit by geov at Feb 1, 2022 2:03:25 PM
Jrinne
Re: Do you have any suggestions for ETF rotation models?

One way to illustrate what I am getting at is to take a portfolio of 33% each of XLU, XLV and XLP ("provided portfolio" in image). The average return (or "expected return") each month for this portfolio is less than SPY. And yet the CAGR for this portfolio is better than SPY. This it because a portfolio with less volatility, obviously, has less volatility-drag. Volatility affects returns (and not just drawdowns).Jim

The reason that a portfolio of XLU, XLV and XLP provides a marginally higher return than SPY is that XLV alone outperforms SPY by a lot. This has nothing to do with volatility-drag. See the two figures below.


Georg,

Why does a portfolio consisting of XLV, XLP and XLV make you feel so insecure? You get that this was not a portfolio that I was recommending or using don't you?

Seriously, is everything okay?

Best,

Jim

Great theory, "and yet it moves."
-Quote attributed to Galileo Galilei (1564-1642) gets my personal award for the best real-world use of an indirect proof or reductio ad absurdum.
`

Feb 1, 2022 1:52:56 PM       
Edit 13 times, last edit by Jrinne at Feb 1, 2022 5:30:48 PM
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