ETF Mean Regression and ETF portfolio backtesting

Aug 27, 2019 in Backtest | Video

A video to demonstrate mean-regression on ETFreplay.com and some concepts related specifically to ETF mean-regression.

 

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Diversification comes in various forms

Jul 09, 2019 in Backtest

Maintaining a well diversified portfolio is a time-tested way to protect against going all-in on what turns out to be a terrible investment.  Diversification can also be employed at the strategy level for the same reason.  An example of this is the core-satellite framework, where a rebalanced core portfolio is mixed with different strategies that focus on Relative Strength and Moving Average trend following etc. 

It is also possible to diversify across different versions of a single strategy, to reduce the risk of parameter choice misfortune.  For example, rather than relying solely on 12-month returns, for instance, the backtest below equal weights 4 variants of the same model: a 6-month version, 8-month, 10-month and one using 12-month returns all on the same ETFs: EFA, IEF and VTI (the constituents of BNCH).

 

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Just as a well diversified portfolio means that at least some part of it will always be a drag, a composite made up of different model variants will always underperform the best version of the strategy....but it also avoids being exclusively in the worst.

 

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Emerging Markets Lookback Period Fund Backtest Results Array

May 15, 2019 in Backtest | Emerging Markets

One variable to analyze more deeply is the 'Lookback Period' -- this is the period through which you filter out noise.  You obviously don't chase whatever performed best today vs yesterday (a 1-day lookback)... Nor should you chase whatever performed best over the past 5 years (laggard).   Academia has demonstrated in numerous research papers going back many, many decades over many different asset classes that the 3 to 12 month range is the value-added focus zone.  

Set-Up:  We test Emerging Markets over a 16-year period using both monthly lookbacks {3, 4, 5, 6, 7, 8, 9, 10, 11 & 12 months} --- and then also test weekly lookbacks {13, 17, 22, 26, 30, 35, 39, 42, 48 & 52} weeks.   The monthly tests use last day of month to execute rotation, when there is rotation.   The weekly tests use the last trading day of the week (ie, Friday close).    We use zero interest security (XZERO) as our holding when not invested (this is unrealistically conservative but it allows us to compare [3] month with [12] month lookbacks without the minor complication of changes in fixed-income total returns when out of the market).  

Results:  Generally speaking, emerging markets are better examined through a 4-5-month (17-22wk) range in terms of lookback period.  10-11 month were profitable but far less in total return over this period than the other time periods.    Weekly and monthly time periods show similar results showing that variation will occur – we are only looking for larger tendencies here.   Secondarily, 3 & 6 month (13-wk and 26-wk results) proved better than 9 & 12 month.   

VEIEX_16_Year_Backtest_Array_Slide.pdf (129.62 kb)

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Uptrending Ratio Indicates Relative Strength ETF Backtests QUANTIFY It

Apr 23, 2019 in Backtest | Ratio

 

An uptrend is a series of higher highs and higher lows.   Using a ratio between 2 securities shows which is relatively stronger.   A Relative Strength analysis can quantify which security within a list of MORE THAN 2 securities is strongest.  

So let's look at one current situation.    Emerging markets have shown good relative strength on shorter-term basis.  If this continues then a higher low and higher highs situation could develop (vs SP 500).   That said, SPY has continued to be strong -- both Emerging markets AND US Stocks have been strong this year.   It actually hasn't mattered which you've owned --- so even if you were wrong on thinking a ratio would go up/down, you still made good money either way.    This won't always be the case though.   

 

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Channel Backtest Example -- China A-Shares ETF ASHR

Apr 05, 2019 in Backtest | Channel

Channels are a good, simple supplement that offer an ABSOLUTE look and can be used in conjunction with other RELATIVE studies. Wider channels give your trade room to work. Tighter channels will cause some whipsaw losses. If you are bullish on an ETF based on a range of factors, then running a skewed channel might be a good idea --- ie, run the exit (Sell channel) at 0% but a buy at just 60%... This allows you to get in quickly while still offering room for the investment to work. This study uses a simple 67% / 33% buy/sell trigger with a ~6 month lookback (26-weeks means you will trade usually on a Friday -- if holiday then Thursday). Entries and exits only occur on the close of the last day of the week (Fridays) allowing for easy monitoring. Note that this look has trades that have lasted a while. This is because the sell rules will allow a fair bit of movement before exiting.

Finally, because a channel uses a percentage,  it may be easier to see the trend in the ETF than othewise.   An uptrend is defined by higher lows and higher highs.    A downtrend is defined by lower highs and lower lows.   The channel is a another tool to have to see and understand what is happening in the market.

 

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Comparing 2 Ultra-Simple ETF Backtests Side By Side

Jan 15, 2019 in Advanced Relative Strength | Backtest

 The example below is pretty self-explanatory but in a nutshell it compares 2 strategies set side by side in detached browser windows. 

Strategy A on left uses 2 pieces:   1.  50% choose 1 of 3 ETFs using 11-month total return  2.  other 50% using 6-month returns on the same portfolio of ETFs, also choose 1...

Strategy B on right using 1 strategy:  using ONLY 11-month returns.

Rather than only highlight just the overall total return of each,  of high importance is looking at the year by year (Calendar) returns vs a benchmark.   The 100% 11-month strategy has seen years of large outperformance and underperformance.   The blended strategy would have been much easier to stick by and actually achieve the end result - in addition it added return over the period.    We know from many research papers that 3 - 12 month relative strength all have some level of validity long-term.   No matter what the very long-term backtest looks like for these 2 strategies, we cannot know for sure which one is going to do better over the next 10 years.   But we can glean information by studying different types of backtests and help make a judgment about what is happening now.    Indeed, backtests primary function is to help guide you to understand what is happening in the most recent (current) period. 

 

 

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ETF Advanced Relative Strength Backtest Discussion Video

Oct 17, 2018 in Backtest | Video

An updated video for the Advanced Relative Strength Backtest (and we simultaneously provide a brief overview of ETFreplay as well in the beginning of this video). The public video below uses the following subscriber-only backtest ETFreplay Advanced Relative Strength Backtest

 

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Core-Satellite Demonstration. Combining 2 ETF strategies Into a Single Unified Module

Sep 04, 2018 in Backtest | Video

In this video we demonstrate how to build 2 individual strategies and then easily combine them using the Core-Satellite backtest module. The public video below uses the following subscriber-only backtest ETFreplay Core - Satellite Backtest

 

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Backtesting more than 25 securities at once on ETFreplay.com

Jun 16, 2018 in Backtest | Relative Strength | Video

A video showing how to backtest more than 25 securities at a time. The public video below uses the following subscriber-only backtest ETFreplay Relative Strength Backtest - Combine Portfolios

 

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ETF Backtest Concepts - Relative Strength And The Use of a Moving Average Filter

Apr 30, 2018 in Advanced Relative Strength | Backtest | moving average | Video

A video using ETFreplay Backtesting to look at some relative strength concepts and a moving average filter (daily).

 

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