Country ETF Rotation

Cesar, I’ve been studying similar strategies, with similar results. However, how about adding the country CAPE values into Aux1, and then looking for positive momentum with the best CAPE value? I’d be happy to provide you my dataset of country CAPE values if you’d like.
Kindest Regards,
Tony Roylance

You might want to add two additional periods: 1 month and 3 month returns to your analysis. In other words, rank the ETFs on the sum of the 1, 3, 6, and 12 month returns. I would surprised if the results didn’t show significant improvement.

For current values, Star Capital in Germany (http://www.starcapital.de/research/stockmarketvaluation) keeps their site up to date, I believe quarterly. Unfortunately, for historical values, Global CAPE values can be difficult to obtain.
Tony Roylance

The main problem is your testing period. Almost all international countries have sucked as far as returns are concerned for the past 10 years. Compare your rotation system to the returns of the general market. The Vanguard All-World Ex-US ETF has returned a whopping 1.3% CAGR w/ a 61% drawdown since 2007. I’d say your system is doing pretty well all things considered.

To increase performance, run the system from 2003-2007, I’ll bet returns will be outstanding.

You will also need to increase the number of positions. 2 positions when you have a basket of 30 possible ETF’s is not enough. Try testing between 5-10 positions each month and see what that looks like.

Cesar,

Could also try adding, either as a rank value, or as a filter, a short term oversold indicator. One idea for the indicator are % below 5, 10, or 20-day high. Another idea is 100-RSI(3). So you avoid the risk of buying something overbought, get a bit a reversion to mean benefit, but add a slight bias into ETFs that are just beginning a correction.

If you tried this as a filter, and ended up with an SHY position, then mid month you could check again for a highly ranked, oversold ETF to buy. But only allow a rotation from SHY to an ETF mid month. Keep the full rotation (ETF sells) at the end of the month.

Complicated, but eliminates the bias toward the most overbought ETFs that your current approach has.

Seems like the system is getting whipsawed to death. Maybe momentum isn’t the best idea for country funds. Have you considered buying the weakest funds instead?

Check this strategy: https://logical-invest.com/portfolio-items/the-top-4-world-country-strategy/

A few suggestions Caesar.
1) Create a separate emerging markets universe. I’ve found that EM doesn’t seem to mix well with developed countries in ranking schemes.
2) Use a fast 3 mo MA filter for the EM universe. Seems to fit better with extreme volatility of EM universe. (6mo MA filter works better for developed mkts)
3) Add volatility as a 3rd ranking factor

Here are the ranking parameters I use, which seem to work well. They’re my default ones in ETFReplay.
Return A 6 mo, 35% Weight
Return B 3 mo, 30% Weight
Volatility (daily) 3 mo, 35% Weight

I think it will be hard to get any equity model’s SPY correlation much under 50%. You need bonds in the rotation to do that. Good luck! I really appreciate your informative posts.

Hi Caesar,

Yep, simple momentum doesn’t work for stock indices. That would be too simple, wouldn’t it?

Try to add reversion logic to your momentum – say, rank short-term returns, if it is too high – ETF gets low score, if it is too low – high score. Then add up your best momentum and reversion scores – results will improve. The only problem – reversion will increase turnover of your strategy.

These results are not as bad as you imagine. Look, for example, at a benchmark like CWI. That is the all-cap world index minus the US. Total return over the last decade is around 16%. Not annually–total. Returns of 5-6% per year are not so bad under those circumstances. Momentum will work just fine with country funds, but during the 2007-2016 there hasn’t been much trend. Sometimes it also helps to hold slightly more securities. You might try looking at a top 3-4 strategy also, with the bond option during lousy markets.

Rank 1 and 2 seem to be the exact same thing. What is different?

Thanks
Carl

Hi Cesar-

If you want to look at something with limited correlation to the S&P then why not look at currencies? I appreciate that it’s not what you normally do, and as it’s an unregulated market there could be a higher risk of getting stung by a Corzine like character. But it’s a diversification that may have potential.

Thanks

Pete

Hi Cesar,

I’m far from an expert in trading, but after back-testing quite a few types of rotational strategies the only thing that seems to hold true is that market just doesn’t reward traders for having exposure 100% of the time. The biggest punishment for these strategies comes in crisis periods like 2008 or 2011 and with ETFs modest returns it takes a long time to recover from a drawdown. So one would logically assume that it is better just to refrain from trading altogether in times of violent environment. But the tricky part is in determining when the market switches its regime from bull/sideways/bear, because there is just not enough data for statistical significance of such an indicator. It would be interesting to hear your thoughts (maybe post) on this topic.

Thanks.

This may have been mentioned already but how about only taking trades during the seasonally “typically bullish” period which would be say from Nov-April? How would that fare?