Feb 25, 2011
Backtest | Relative Strength
Last summer, we added a feature to the portfolio relative strength backtest application. We added a line that showed what the 'provisional picks' would be if the update period had just ended. The provisional picks listed are the exact same as if you ran the ETF screener using the same list of ETFs and same parameters. We added this feature just as a convenience so it wouldn't be necessary to open another tab and check what was strongest now -- rather than at the last update period.
Depending on the list you use, it is of course possible that the 'provisional pick' is not the final pick (hence the term 'provisional'). But what if we just looked up the provisional pick on the next-to-last day of a given month and bought that ETF the next day on the close and held it for the subsequent period? What would the performance look like assuming we did that? Would it be similar?
Let's look at a simple example just to discuss the mechanics of what we mean. We will compare using the 'next-to-last day picks' with the 'last day picks.' The holding periods will be the exact same, we are just reading the picks of the ETF screener with a one day offset. Of course, for many periods the picks (and therefore performance) will be the exact same.
In this example, we will use one of the Ivy Portfolio lists of 5 basic ETFs and a semi-monthly update period. We are choosing the top 1 of 5 and holding it on 2-week intervals. The settings are the exact same except we are checking the box "Invest in next to last day pick(s) near the top of images below.
Using Regular 'Last Day' Picks:
Using Next To Last Day Picks:
We can see that the returns follow similar paths but that there was a difference -- even for this list of just 5 ETFs. In this case, the next-to-last day picks actually performed better -- which means very little in and of itself. We simply are pointing out the mechanics of how it works. Users should test this using their lists across various other settings and draw their own conclusions. Our view is that this doesn't change anything -- if your backtest is well thought-out, then this extra analysis will very likely show a result that is in the same ballpark as the original method.
Final note is that today is Friday, February 25th -- so the next-to-last days picks will be locked in and known after todays close. The final picks will update using Monday's (Feb 28) closing price. In both cases, the backtests will assume the cost-basis for March performance is the closing price as of Feb 28.
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