Oct 06, 2017
Regime Change
This backtest defines a Regime by comparing the performance of EFA and QQQ, two standard ETFs with plenty of market cap. The backtest then decides to allocate to EFA or QQQ depending on which Regime is in place. SPY is held in either case as a core position:
Oct 03, 2017
Drawdown
Sep 27, 2017
Drawdown
Over the past ~15 years, the bond market has generally had positive single-digit returns and also single-digit calendar year drawdowns. As the gentlemens asset class, bond ETFs generally don't have the anguish associated with the big drawdowns of many equity ETFs.
For a reference point, below is a snapshot of Calendar Year returns and drawdowns for LQD, an investment grade bond ETF:
What is remarkable about this year is the combination of high returns with extremely low drawdown in some traditionally high-vol, high-drawdown segments - such as emerging markets. 2017's max drawdown for emerging markets has actually been less than most BOND market years.
+27% YTD total return near the end of the 3rd quarter of 2017 vs just -3.5% drawdown. Obviously, strong return and Low volatility leads to high rankings in our Relative Strength models. Uptrends can have some violent short-lived corrections but investors can manage such volatility by tilting their portfolios away from the weakest segments.
Link to the tool in this blog (subscribers): ETF Max Drawdown
Sep 11, 2017
Total Return
Does the ETF market price track the ETF's underlying index?
No. You must calculate the Total Return and use that resulting data series for accurate backtesting signals.
ETFs as you may be aware are designed to track an index. In order to have the ETF track the index in terms of a backtest, you need to re-vinvest the dividends and distributions paid. An 'index' of course doesn't make distributions since it is not an actual investment product. So the 'index price' actively builds the dividends back into the calculation of the index value (price). But ETFs don't do this, they must pay out distributions by SEC law.
Thus, only the CALCULATED total return data series can represent the INDEX PRICE (the ETF PRICE does not). If you just used the ETF price, you will get inaccurate signals. You can observe the difference between the price return and total return with our Total Return vs Price Return tool.
Aug 29, 2017
Trend Quadrants
Let's look back to 2016 and the market environment in the lead-up to the U.S. presidential election. What were the market conditions telling you?
Is the market moving TOWARD higher-beta, risky, higher-return-but-more-volatile assets? Or is it moving AWAY from those and into lower volatility, lower risk, safer assets? This is what actually matters.
If you take a snapshot of the market 3 months prior to the election, you can see various risky assets in 'Reverse Up' position. That is, their 6-month returns were up while the previous 6 months had been down. We can view this on our ETF Trend Quadrants module (located on the ETF Tools page):
Here is the position 1 month prior to Election Day. Note ETFs here are moving to the right. This represents money flows IN.
And then we align 2 browser windows to show Election Day and 1 month after:
Let's also cross-reference this thesis by looking at the credit markets, High-yield bonds vs Treasuries in ratio moving average form:
From 2014 into early 2016, high-yield bonds had under-performed treasuries materially. But a sharp V-spike reversal occurred in this ratio in early 2016. It was not unreasonable to think a new period of risk-on was possible if not likely given the 2014-16 relative drawdown.
The point of all this is NOT that these ETFs predicted the election. They didn't. The point is that the market conditions were bullish and this was visible in looking at the many intra-market relationships via ETFs. Sometimes the markets will whipsaw around in a tricky trading range -- but often times the markets follow the flows and 2016-17 is a real nice example of this.
Our Twitter feed on November 9, 2016 made this point as well:
