A Global Market Rotation Strategy With An Annual Performance of 41.4 Percent
A Global Market Rotation Strategy With An Annual Performance of 41.4 Percent
A Global Market Rotation Strategy With An Annual Performance of 41.4 Percent
4%
since 2003
The following strategy is one of my favorite rotation strategies, which many of my friends, customers
and I use now for some years.
Why rotating?
The 5 ETFs follow slightly different economic cycles and there are long periods where one market
outperforms the other until it becomes so overpriced and investors begin to remove their money
from that market in order to invest in other cheaper valued markets.
Looking back 12 month, we see that the US market was the clear winner and the MDY S&P Midcaps
performed +35%. In comparison, the ILF Latin America market lost nearly -10% and the more
important EEM Emerging Markets ETF only made +3.5%. Rest assured that this outperforming will
not continue forever. At one moment EEM, ILF or another ETF will bounce back and outperform the
US market. This is the moment when I switch the ETFs.
However, switching between these markets alone is not enough to really get a good performance. By
switching only between this 5 ETFs I would have made 21% annual return since 2003. Not too bad,
compared to the 8.4% of the SPY S&P500. But if I look at the charts, I recognize that during periods of
big market corrections also all my 5 ETFs suffered big losses. Although these markets are globally
distributed, the correlation between them is very high. The 60 day correlation is mostly higher than
0.75. This means there is no way to escape a market correction like the subprime crash in 2008 when
the S&P500 lost nearly 55%. To avoid this scenario, we would need to switch to some negatively
correlated assets. The best are US-Treasuries and if they do not work, then cash is an option as well.
Based on my strategy back tests, I have chosen the EDV - Vanguard Extended Duration Treasuries
(25+yr) ETF. At the moment, due to rising yields, the correlation to the S&P500 (SPY) is nearly 0
which is quite abnormal. Normally the correlation it is between -0.5 and -0.75. However, I am sure
that during a future market correction these correlations will go down very quickly.
When designing a good rotation strategy, the Return to Risk ratio (Sharpe-Ratio) is one of the most
important numbers. The higher it is, the more return you will get for the risk you have within your
investment.
Return to Risk ratio (Sharpe ratio)
Strategy (investment 2003 today)
Sharpe ratio
Volatility
Annual return
0.19
33.1%
2.6%
0.18
27
3%
0.40
5.4%
4.3%
0.38
20.3%
8.6%
0.73
28%
21.3%
1.25
23.3%
33.8%
1.38
25.6%
41.4%
* For the last three rotation strategies we invest in only one ETF at the time
GMR performance
34.9%
24.6%
36.8%
39.4%
38.5%
55.4%
56.7%
40.0%
89.4%
S&P500 performance
28.2%
10.7%
4.8%
15.8%
5.1%
-36.8%
26.4%
15.1%
1.9%
2012
2013 until end July
14.2%
19.4%
16%
21.2%
My Mathlab method is very interesting to test if an ETF can be used for a rotation or a trend
following strategy. You cannot use an ETF if you cannot find a look back/investment period pair
which gives you a stable positive return. Also for some ETFs you get completely different returns,
only by changing the (a) parameter a little bit. Such ETFs are also not good for rotation strategies.
For example, it is nearly impossible to design good rotation strategies for commodities. They are too
volatile and they can be very easily be manipulated. Also, if you the look back (a) and investment
periods (b) are too short, it becomes difficult to achieve positive returns. The shorter the periods are,
the more your performance becomes a function of the random market noise which overlays existing
trends. This is why I am not a friend of intraday trading. In addition intraday trading is really a hard
work. I rather make money without being shackled to a computer screen the whole day.
For the ranking, I also use the volatility of the ETFs. While this is not so important for the 5 Global
market ETFs, it is important to lower the EDV ranking a little bit according to the higher volatility of
the EDV ETF. EDV has a medium 20 day volatility which is roughly 50% higher than the volatility of
the 5 global market ETFs. This results in higher spikes during small market turbulences and the model
would switch too early between shares (our 5 ETFs) and Treasuries.
This probably sounds now very complicated, but you can get quite good results by just looking at the
3 month historical performance and then always invest the next month in the best ETF. This is
something you can do by yourself. You will still make about 34% annual return per year. The
additional annual return I get for these complicated calculations, however, is +7.4% which is also not
too bad.
Portfolio GMR
SP500
month
ETF
Sep.2012
EPP
2.8%
2.5%
Okt.2012
EPP
2.5%
-1.8%
Nov.2012 EPP
1.8%
0.6%
Dez.2012
EPP
3.8%
0.9%
Jan.2013
EPP
3.5%
5.1%
Feb.2013
MDY
0.8%
1.3%
Mrz.2013 MDY
4.8%
3.8%
Apr.2013
MDY
0.6%
1.9%
Mai.2013
MDY
2.3%
2.4%
Jun.2013
MDY
-2.3%
-1.3%
Jul.2013
MDY
6.7%
4.8%
As you can see, since January the strategy is invested in MDY. It is not necessary to switch the ETF
every month. I would say, that you have to switch all 2-3 month on average. In addition, instead of
buying the ETFs, you can buy Comex futures for some of the ETFs. This is what I do. It is the case for
MDY and IEV (Europe). Instead of the EDV you can buy Ultra-TBonds which are similar to the TLT ETF,
but you have to buy about 1.5x your normal investment because EDV behaves like a 1.5x leveraged
Ultra-TBond.
If you are interested to follow exactly my Global Rotation Strategy you can subscribe to my
inexpensive monthly strategy email which tells you by month end, what ETF you have to invest for
the next month. There are also some other strategies from a very conservative low volatility bond
rotation strategy up to a strategy with 70.5% annual return investing in inverse volatility.
If you are interested, and would like to have you assets managed by us, please contact me for further
information.
In addition, you find all this and additional information on our website www.logical-invest.com