Momentum System for ETFs /ETCs

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AFJ Garner
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Momentum System for ETFs /ETCs

Post by AFJ Garner » Fri Oct 03, 2008 8:59 am

Intrigued and impressed by the track record of http://www.noloadfundx.com/ as tracked and reported over 25 years by the Hulbert Financial Digest, I decided to put such a system to test on around 400 proxy ETFs for the past decade. The 400 securities I used included not only many world stock markets and sectoral stock indices but also bonds and bond funds, currencies and commodities.

I am unable at present to add dividends to the mix for technical reasons outlined on another thread but neither have I deducted management fees.

The images below give the basic details of the system and the results, which, while not approaching the smoothness of an equity curve created by back testing a basket of diversified futures systems, nonetheless puts to shame the majority of funds in the 14,000 strong Morningstar Database both on an absolute and risk adjusted basis.

Others will no doubt have noted the advantages of such a system, which rotates on a monthly basis into the top X performing funds. You can work with as big a potential portfolio as you like. The optimum X for my purposes looks, to date, to be around 25. Using 10 produces a much higher CAGR but, unsurprisingly, at the cost of a significantly greater maximum drawdown.

Using such a system on stock ETFs alone is sub-optimal. The inclusion of bonds and currency funds means that at times such as these you are out of the stock markets and into cash and bonds.
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LeviF
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Post by LeviF » Fri Oct 03, 2008 9:37 am

Interesting, thanks for sharing.

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Post by sluggo » Fri Oct 03, 2008 1:07 pm

AFJ, Thanks for sharing this! I think your inclusion of debug parameters right in the system interface is quite brilliant, congratulations on that.

Could you say a bit more about what "Choose Momentum Calculation = All" actually means? My fevered imagination conjures up notions of ranking the instruments four times (using the four different momentum lookbacks), then for each instrument, calculating the average of the four rankings, and finally using these averages as the final ranking. ???

Thanks again.

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Post by AFJ Garner » Fri Oct 03, 2008 2:08 pm

I followed as closely as I could divine it the method used by FundX. Momentum All is the sum of the 12, 6,3 and 1 month returns for each respective instrument divided by four. Rankings are then made on the basis of this average return along the lines of:

Code: Select all

instrument.setLongRankingValue(momentumAll)
Crude but, it would appear, effective.

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Post by IRVLLC » Wed Oct 29, 2008 2:54 pm

Very interesting AFJ. I have been trying to find a clean way to rebalance either monthly or quarterly a similar system using ETFs. If you have the desire I would like to hear how you accomplished this. I just found your post on Marketplace (Stocks BBO) so maybe that will get me going in the right direction.

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Portfolio design

Post by Mats » Wed Oct 29, 2008 3:57 pm

Thanks for very interesting info.

I noted that ths short parameter was only 3.

Have you included the inversed ETF instruments as Powershares short and ultrashort family into your portfolio design?

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Post by AFJ Garner » Thu Oct 30, 2008 3:27 am

The Blox I posted on a BBBO system for stocks does indeed contain the coding for re-balancing and for mitigating the build up of margin.

No, I included no short only ETFs and indeed could find no profit to be had out of the short side on any parameter using this system. Perhaps I did not look hard enough.

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Post by droskill » Sat Dec 06, 2008 4:13 pm

Is this system available anywhere for download for Blox? And any update on the performance? I've got a similar system that had a massive drawdown since December.

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Post by ecritt » Sat Dec 06, 2008 5:24 pm

AFJ,

Has your opinion of FUNDX changed after their 50%+ drawdown? Or was that within your range of expectations?

Thanks,

ec

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Post by AFJ Garner » Sat Dec 06, 2008 6:06 pm

AFJ Garner wrote:Using such a system on stock ETFs alone is sub-optimal. The inclusion of bonds and currency funds means that at times such as these you are out of the stock markets and into cash and bonds.
The problem with FUNDX is that they remain invested at all times in stocks and stock funds. As I hinted in my first post above, you need a place to fly to in times of danger. FUNDX did not have that place.

No, I am not at all surprised and no it does not destroy the basic idea.

You may note the “filterâ€

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Post by AFJ Garner » Sat Dec 06, 2008 7:15 pm

I do not have the same portfolio to hand beyond 20th November 2008 - the reason being that as regards bond funds, commodities and currencies, I had to create my own ETC proxies for the purpose and have not updated them recently.

However, I do have updated data for a bunch of 26 different country indices, ranging from the S&P to the Hang Seng.

The below sets out the results as of yesterday’s date. Max Long Instruments is set at 10, otherwise all settings are the same as used in the above test. Dividends are however re-invested and an annual TER of 1.5% is charged, in addition to slippage and commission, in an attempt to simulate manager’s fees, fund expenses and tracking error.

Hope this is of help.
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Post by droskill » Sat Dec 06, 2008 7:22 pm

Have you tried the system with other money management schemes?

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Post by droskill » Sat Dec 06, 2008 7:26 pm

I run a similar system in a different program, mainly because I couldn't figure out how to put together something like that in TB. I use much less funds than you do - the returns are better as you might expect but the drawdowns are larger as well. Like you, I put a filter on it that determines whether or not to be in the funds based on a moving average.

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Post by AFJ Garner » Sat Dec 06, 2008 7:30 pm

You might enjoy seeing precisely the same test on precisely the same portfolio of 26 indices. This time WITHOUT the filter.

You may see why the FUNDX performance is of no surprise but why also it is no deterrent.
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Post by droskill » Sat Dec 06, 2008 7:38 pm

Here's the raw returns for my system without the filter.

Image

Obviously the returns are reduced by the filter.[/img]

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Post by drm7 » Thu Dec 11, 2008 10:29 pm

I wonder if the "FUNDX with a filter" system could be benchmarked against a "fixed allocation system with a filter" such as Mebane Faber's 10 month MA system.

Is it the ranking of the ETFs, or the filter that is bringing the most value?

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Post by droskill » Sat Jan 03, 2009 5:20 pm

drm7 wrote:I wonder if the "FUNDX with a filter" system could be benchmarked against a "fixed allocation system with a filter" such as Mebane Faber's 10 month MA system.

Is it the ranking of the ETFs, or the filter that is bringing the most value?
In my opinion it is the ranking because it pulls out the outperforming funds. Contrast that with Faber's system which uses only 4 instruments. If none of those are top performing, then you'll get average results. Faber's system is, still, very interesting.

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Post by Perry » Mon Jan 05, 2009 6:02 pm

AFJ, thanks for sharing.

I’m pretty new to Trading Blox. I had looked at noloadFundx, but was not real excited, essentially for the reasons you pointed out. I’ve recently been testing long term trend following systems on mutual funds and was puzzling over how to put the two concepts together…perhaps due to my limited Trading Blox Builder coding experience. With your post, the light came on! Thanks. The answer is simple, although not necessarily easy.

droskill wrote:Have you tried the system with other money management schemes?
droskill,

Your question prompted me to wonder how I might test the money management question. I interpreted “money managementâ€

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Post by AFJ Garner » Fri Feb 20, 2009 2:55 pm

Blox posted in the market place:

viewtopic.php?p=35236#35236

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