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Weekly ETF Switch V 1.0

by saratur, 3238 days ago
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ETF Switching Strategy (Weekly)

This is a momentum based ETF switching strategy. You can use it as a starting point for developing your own system.
The concept of momentum based sector rotation or switch between asset classes has been around for a long time. Typically such a system looks at a group of asset classes - whether it is industry sectors represented by mutual, or broader asset classes (e.g. US stocks, bonds, commodities, country or region equities etc.) . Periodically the asset classes are ranked according to their recent performance. The asset that performed the best recently (or several top ranking assets, depending on the system), is invested in for the period. "Recent performance" is typically measured and ranked based on the percentage return of the asset over a period of time (simple momentum), though other indicators may be used. The lookback periods for performance ranking vary; typically they range from 3 months to a year.

This system presented here uses the True Strength Index (TSI) indicator to rank the assets using relatively long lookback periods. This is a somewhat a-typical use of the TSI that was initially intended to produce shorter term trading signals.

The system is intended to trade ETFs. As presented, it checks for ranking once a week, and picks a single top ranking asset to be held for the next week. While the ranking is checked weekly, actual asset switches are much less frequent, only few times a year on the average.

System behavior and performance will vary according to the group of ETFs used. For a system that picks a single top ranking asset it is usually preferable to use a relatively small list, and include assets that are not highly correlated. Inclusion of short term treasuries implements implicit market-timing (cash is chosen when all other assets lost money recently). See "15 ETF Symbols of Major Asset Groups (ETF AA-15) " as an example.

While the system is intended as an example, backtests show market beating returns. Ten year backtest on AA-15 with lookback values as enclosed shows annual return of 22% (627% total) with a Sharpe of 0.98 and maximum drawdown of 27% vs. negative total return of about -2% and maximum drawdown of 57% for the S&P 500.

Best if you use this system as a starting point for developing your own. One may optimize the lookback periods attempting robust selections, add indicators, modify the ETF used, increase the number of holdings to reduce volatility, etc. When back-testing using ETFs it is important to bear in mind that many of those are in existence for only a few years.




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Type: Trading System

Object ID: 862


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Market: ETF Market

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