Sep 19, 2011
We have added a new module to ETFreplay.com that expands the functionality in a logical way. It is located on the My Account tab:
ETFreplay.com has advanced methods for screening and backtesting various relative strength and moving average strategies. The ETFreplay.com community runs thousands of backtests and it makes sense to see how members may be able to help each other with shared research ideas.
If you think about portfolio management, it doesn't matter what your process is --- in the end, when each day closes --- you have a portfolio filled with securities. Even if your portfolio is mostly cash, that is still an allocation. So our new Allocations module allows you to go to the final step in a process -- that is, take everything you know --- from fundamental to quantitative etc... and create an allocation. Once set-up, we will automate the tracking of the total return -- as well as calculate some of the most important items --- such as your portfolio volatility and portfolio drawdowns and sharpe ratio etc...
Importantly, you can do this privately if you would like --- or you can place the allocation you create on the public Allocations Board. You create your own customized fund symbol (ie, ETFRS) to identify the allocation. You can comment on each others allocations or choose to have comments turned off. You can keep watch lists of various strategies (from those which have chosen to be public). You can delete or create new allocations. We have tried to design it in a way that simply helps you to make better portfolio decisions. And as we've done with all of our applications, we will make the module significantly better over time.
ETFreplay.com has provided research applications that aid in the investent process --- but we simply can't model every possible variation of your requests into a few clicks. After you have researched and tested some ideas and have weighed all the variables and then have decided what to do, what we can do is capture the final allocation that you enter.
Note that we have installed some rules that may seem a bit rigid at first --- but these rules are necessary as we do not want to have this become a short-term trading competition. This is about portfolio management, not the latest earnings speculation or the macro news-of-the-day. The graphic below is one way to visualize the process as we see it.
Note that you can set an allocation to begin and it will use that days closing values. You can update on any day and it will then save the result of the historical fund return and subsequently combine that with the return of the new allocation. We will capture the total return of all securities (adjusting for dividends & cap gains distributions) so that your income securities are properly tracked. We know that relative to a real account, sometimes you will get a price that is different than the closing price -- but this is an allocation app and its purpose is to show various types of portfolio strategies --- not to perfectly mimic intraday trades.
Over the long-run, allocation moves are the overwhelmingly dominant factor in portfolio performance. Sometimes you may get into an ETF at a price $0.25 better than the closing price --- but this will be partially offset by the times your entry is worse. In the long-run, this is a lot less important than other factors.
We have been in beta testing on this the past few months and have worked out many of the details. We plan to add various features to this module over time. We are calling this a BETA product for now as we may have some plumbing adjustments necessary depending on how many people find use in this module and will surely have to allow for the scaling of data should many people like this feature. So please give it a try and tell us how you like it -- it is included in your existing subscription so there is no additional cost. We are excited about the potential this new application has should the ETFreplay.com community begin to share ideas and learn from each other not just through talk --- but through portfolio allocation actions.
Jul 21, 2011
Total Return
Total return is a concept that is surprisingly misunderstood. We get emails asking why does our moving average not match Yahoo or Tradestation?
Most Internet data sources and brokerage software platforms don't track total return -- yet total return is how all index returns are stated. In 2010, the SPDR S&P 500 index fund (SPY) was not +12.8%, it was up 15.1%. Vanguards investment grade bond fund (VCIT) was not +5.1% in 2010, it was +10.0% (and had some nice tactical swings throughout the year). The difference was distributions (which come in 2 forms: dividends and capital gains distributions).
One common thing we see is for various people to compare their performance to the price-only +12.8% and then footnote it saying 'dividends excluded'? To us, this is just as bad as mutual funds that claim the expense ratio is 1.2% and then footnote it saying you will be charged a 3% redemption fee if you sell the fund in first 5 years. There are no hidden fees with ETFs -- no sales loads, no purchase or redemption fees, no 12-b-1 fees. The 'A-class' 'B-class' 'C-Class' 'H-Class' 'I-class' mutual fund system is non-sensical in the ETF world --- there is only a single class of an ETF.
Here is another one: the Vanguard 60-40 stock-bond balanced fund returned +20.1% for the 10 years ended June 30th, 2011 [1]
[1] excludes dividends
Well, a large part of owning a bond in the first place is the coupon. As it turns out, that index fund (VBINX) was +59.7% INCLUDING dividends. So it is entirely disingenuous to compare to a number that is one-third of the actual index return.
While this is all obvious to some -- it is clearly still not understood by many.
We created a free Comparison Tool to make it easy to view this concept as we feel the only REAL way to truly understand something fully is to interact with it through an application -- rather than just read about in a paper or on a blog.
Try a few out. Be aware that even if its not a large dividend payer, any capital gains distribution will also affect the return.
Bond ETFs:
Others:
Jun 29, 2011
Video
A brief introduction to the versatile yet easy-to-use 'Compare Portfolios' application located on the backtest page
Mar 18, 2011
Backtest
It is well accepted in professional money management that having a quantitative aspect to your investment process is additive. That is, quantitative methods can greatly help in screening and monitoring lists of securities into a manageable ranking for further analysis. The vast majority of institutional-oriented firms do this kind of thing.
The classic, basic steps of an investment process involve:
- Install a (Quantitative) Method To Rank A Relevant Universe of Securities
- Take The Top-Ranked Securities And Do Further Research
- Construct a Portfolio Using Securities That Pass The First 2 Steps
- Monitor And Update The Portfolio
- Repeat
We view backtesting as a very practical and useful part of the research process. The way you rank securities should be based on something consistent with your beliefs on what actually works.
Once you have done some research and found a method to rank securities, run some backtests. You will learn about your method greatly and can understand more aspects and characteristics of such strategies. You will speed up your understanding and you will be forced to think through all the details of how you are going to execute your process.
Once you have created a portfolio (per Step 3 above), that portfolio effectively now becomes a ‘forward-test.’ Monitoring these portfolios and seeing these various rotation strategies behave is a crucial part of the process. Track your various rotation strategies. You can learn a lot by running many simultaneous ‘forward tests’ at once. Importantly, you will get a feeling for the ‘short-term noise’ that occurs around your strategy. Even for professionals, the psychological aspects of short-term volatility will cause them to doubt themselves. Back/Forward tests will make you much more aware of the kind of thing you will face in the future. You must get used to this as psychological aspects to investing are absolutely critical.
Back/forward-testing accelerates the learning process and you can then feed the incremental improvements you discover back into your actual portfolio. The point is that just doing a backtest and then ‘stopping your research’ is very limiting. Don’t stop learning, don’t stop improving. Small incremental improvements add up over time.
We are entering the golden age of active indexing. The specialized, targeted index fund is really a somewhat new phenomenon. Index funds in the 1980s were all very broad vehicles. Many specialized index products (Vanguard REIT index mutual fund, country fund ETFs) actually only have histories back to 1996. You can simulate prior performance -- but they weren't so inexpensively accessible. TIPS securities weren’t even issued by the Treasury until 1997. The World Equity Index products (mutual fund AND etf) didn’t launch until 2008.
Important new areas of future investment may come from newly investable products. For example, the emerging markets small cap index might become as mainstream a product as some other well-accepted benchmarks are today. Understanding the important indices of tomorrow might be as good an idea as understanding REIT and emerging markets indices when they were new PRODUCTS (ie, investable and tradeable at reasonable cost).
Understanding and processing relative performance, relative volatilities and observing relative drawdowns in present ‘forward-test’ environment strikes us as a pretty good idea.
iShares is bringing to market an Internationally focused preferred stock index. Wisdomtree just launched an Asia-Pacific regional intermediate bond ETF. Remember that at one point, the emerging markets index mutual fund was brand new (1994). Today it is a primary index everyone follows. Growth vs value wasn’t mainstream until the 1990s -- and indexing these products came later. The world evolves. Embrace the change and learn from it – let many simultaneous forward tests accelerate the learning.
Jan 19, 2011
Down Days
As we enter a period of higher volatility after a long sustained move up in equities, we ran some statistics on 25 of the largest ETFs in the world to see how they performed on a relative basis when the S&P drops X%.
In this case, we chose to use 10 S&P pts, which works out to about 0.75%. How did various ETFs perform on just those particular down days?
Since the March 2009 low, the S&P 500 has dropped in excess of -0.75% eighty-five times. The average S&P 500 loss for these 85 days was -1.68%. Here are some results for 25 ETFs which summarize their performance on just those 85 days:
You can see that among the worst for this period were REITs (VNQ), U.S. financials (XLF), Brazil (EWZ) and U.S. Small Cap Stocks (IWM). It makes sense, these are all higher volatility market segments. Technology stands out for doing a bit better than you might have expected.
Bond indexes have low standard deviation and low correlation to U.S. stocks so they generally rose --- but as you can see, very modestly and not nearly enough to offset much of the loss in equities.
Gold, Preferred Stocks and High-Yield Bonds all show losses on average -- but more modest losses given their lower correlations with stocks. Dividend ETFs (DVY, SDY) were down on all 85 days (85 for 85) -- which isn't a big surprise. The dividend indexes didn't do particularly well on a relative basis however and lost almost as much as the S&P 500.
Now let's look at todays (Jan 19th) drop in various markets:
At the bottom of the list of todays (1-Day) performance are the exact same ETFs as the first list.
A couple of ideas here:
1) If you think you are going to get any diversification benefit from owning REITs in a down S&P market, we would tend to doubt that.
2) Bonds don't provide much absolute protection in S&P 500 down days --- but they do obviously serve their purpose of stabilizing a portfolio.
3) Dividend stocks may offer only modest protection in down markets.
Note that the China ETF (FXI) went up slightly today -- so there is the outlier of the day (of course no conclusion to draw here off 1 day of data).
Summary: it helps to study volatility and down markets. Todays performance was quite consistent with the same relative stats of the last two years.
Update: The first screenshot is now available in application form -- because it runs by auto-loading your user-created portfolios, it needs a login to access the page: ETFreplay Tools Page