ETF Relative Strength Backtest

Feb 16, 2024 in Backtest, Relative Strength, RS Composite

The ETF Relative Strength backtest, which is free to use, now offers the option to backtest either regular 3-Factor RS models or Relative Strength Composite models.

With Relative Strength Composite, rather than relying on a single lookback period for relative strength, you can diversify across a range of RS lengths and thereby protect against parameter choice misfortune.

i.e. though a particular lookback may have historically outperformed other lookback lengths, there's always the possibility that it may underperform in the future.

The RS composite model reduces that risk by stepping through the lookback periods, from your chosen minimum to maximum, and invests in the top (strongest) of the 3 securities from each of those.

In the example below the minimum RS length is 3-months, the maximum is 12-months and the step value is 1. This means that, each month, the backtest will invest 10% in each of the:

• Top ETF from QQQ, MDY and SPY ranked by 3-month total return
• Top ETF from QQQ, MDY and SPY ranked by 4-month total return
• …5-month total return
• …6-month total return
• …7-month total return
• …8-month total return
• …9-month total return
• …10-month total return
• …11-month total return
• Top ranked ETF from QQQ, MDY and SPY ranked by 12-month total return

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If QQQ ranks top for all 10 of those specified RS lookback periods, then 100% will be invested in QQQ.  If SPY ranks top for 11 and 12-month returns and QQQ for the others, then 80% will be invested in QQQ and 20% in SPY. etc etc.

The step value can be increased to determine whether it is possible to obtain sufficient diversification without needing to employ every RS length. For instance, raising the step value to 3 in the above example will mean the backtest ranks QQQ, MDY and SPY by 3, 6, 9 and 12-month returns each month and invests 25% in the top ranked security from each of those. 

To backtest just 6 and 12-month RS lengths, set RS Length Min to 6-months, Max to 12-months and Step to 6. The backtest will then, each month, rank QQQ, MDY and SPY by 6 and 12-month returns and invests 50% in the top ranked security from each. 

Go to the ETF Relative Strength backtest

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Note:

1. All returns on ETFreplay are Total Return, which accounts for price appreciation and the receipt and reinvestment of dividends (and any other distributions, such as capital gains distributions). See Total Return vs Price Return

2. Subscribers, when logged in, have the option to switch from backtesting relative strength to mean-reversion and are not restricted to the 11 symbols provided for ETF 1, 2 and 3.  Annual subscribers (regular and pro) also obviously have access to the fully fledged portfolio RS Composite backtest.

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