How good is Smart Beta?

A popular topic lately has been “Smart beta” ETFs. What is smart beta? It is using different ways to weight an index and the ETF that tracks it. For example, the S&P500 index is a capitalization weighted index. Bigger companies have a larger portion of the index. If you look at the SPY, Apple which is the largest company, accounts for 4% of the index (https://www.spdrs.com/product/fund.seam?ticker=spy). Other ways one can weight an index are equal weight, by volatility, by fundamental measures, by technical measures and so on. Why would you do this? To beat the returns of the S&P500 index . But are these other ways better?

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Interviewed on Better System Trader

I was recently interviewed on Better System Trader. Go here to listen to it. He also has some other good interviews with Jake Bernstein and Brent Penfold which I listened to. I need to get around to the Nick Radge interview because I am meeting him next month at the 2015 Australian Technical Analysts Association.

Some quotes from my interview.

There is nothing that will dig at you like trading with real money on the line.

Most of the time huge losses can’t be avoided because they’re overnight gaps you can do nothing about.

The wrong time to be making your plan is in the middle of a trade.

Got questions about the interview? Send them my way here.

As a side note, the site got a makeover because the site was not “mobile-friendly” which Google does not like. If you see any problems or have comments, email me.

Good Quant Trading,

Re-balancing: Is it worth the time and effort?

David Weilmuenster is today’s guest author. David and I worked together at Connors Research for eight years and is one great researcher and AmiBroker programmer.

Brochures for professionally managed investments and academic white papers on long term investing almost always praise the benefits of regularly re-balancing a portfolio. The benefits can arise from the interaction, or correlation, of periodic returns among the constituent assets in a portfolio. As the correlations among constituent assets decrease, the long term returns of the overall portfolio generally will increase with regular re-balancing. This has become known as “the only free lunch in investing”, although it does not work out that way in all situations.

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What I am reading: April 1, 2015

Recent articles that I found interesting and made me think. For more articles see the quant mashup Quantocracy.

99 Problems But A Backtest Ain’t One– “The first time one can actually realize how good (bad) his chosen backtesting solution is when the strategy is traded live. However I am always amazed how little some traders pay attention to how closely their backtest match their live results.”

Torturing Historical Market Data – The first sentence is so true. “There’s no such thing as right or wrong data, just better or worse. Stock market data looks spotless when you just see the performance numbers, but looks can be deceiving.”

Screw It, I’m All In, Baby – A little chart humor but so true.

Improving the Simple ETF Rotational Trading Model – “What I love about trading models like this is the simplicity. So often simplicity trumps complication. Simple systems often have one important characteristic. They often get you out of the market during bear markets and get you back in to ride the next bull cycle. That is, if you are disciplined enough to actually follow the rules, which of course is another entire topic.”

The Martian by Andy Weir – I read maybe one fiction book every 2-3 years. This is a great book. A fun and entertaining read. Be warned you will lose sleep.

Good Quant Trading,

Speaking at the 2015 ATAA conference

I will be speaking at the 2015 Australian Technical Analysts Association on May 15 to 17, 2015. My topics are “The development of an S&P500 stock weekly rotation strategy” and “From Internet Article to Trading Strategy: An ETF Monthly Rotation Strategy.” For more information about the conference go here. I am excited to meet some of my readers at the conference.

I will have two free days to explore Sydney before the conference. If you have any suggestions on things to do and see (I will not have a car) or places to eat (from hole-in-the-wall to fancy) or hotel to stay at (want to stay in the heart of Sydney), put them in the comments.

On May 13^th, I would like to get together with some of my Australian readers in Sydney. If you are interested in meeting either for dinner or drinks, please contact me. Depending on the size of the group it may just be drinks. Any suggestions on where to have the get together are appreciated. I plan to stay in the heart of Sydney but have not booked my hotel yet.

What is the must eat restaurant in the heart of Sydney? Put it in the comments below.

Good quant trading,

ETF Sector Rotation

My recent research has been in ETFs which I have not explored in several years. ETF sector rotation has always intrigued me. The idea seems so simple that it should work. Always be in the sector that has been doing the best. I like simple but does it work? If not, can we make it work?

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Developing Leveraged ETF Strategies

How should one develop a strategy for leveraged ETFs? Do you develop the strategy on the unleveraged ETF and then apply the rules to the leveraged ETF? Or do you develop the strategy on the leveraged ETF directly? Or do you develop the strategy on the unleveraged ETF then use signals on that to trade the leveraged ETF? On first blush one would think that all three methods would produce identical results. But as we know, the obvious is rarely the right thing for strategy development.

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What I am reading: Feb 11, 2015

Recent articles that I found interesting and made me think.

S&P 500 Snapshot: Check out the ‘A Perspective on Drawdowns’ to see how shallow drawdowns have been overall since 2009.

This Is The Best Illustration Of History’s Bull And Bear Markets We’ve Seen Yet – A longer term look at the markets. Our current bull market does not look so great compared to others. I am sucker for pretty charts if you could not tell.

Missing What is Missing – A good TED talk about survivorship bias outside the trading world with plenty of application back to the trading world.

Mindfulness, meditation and investing – I thought that I would never do it but I started practicing mindfulness about 2-3 months ago and have been surprised by thoughts that jump into my head.

Good Quant Trading,

Trading stock splits

Trading stock splits is something that I have read about for long time but never researched. This article, A simple way to beat the market with stock splits, caught my eye and gave me the push to investigate the topic. This falls into the category of a topic I have heard a lot about that I can’t believe that it would work but as always one must test. One never knows.

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Using 52-week highs in a S&P500 monthly rotation strategy

One area of recent interest for me is trading rotational strategies on a monthly timeframe using S&P500 stocks and ETFs. Areas of exploration include Momentum and Dual Momentum. Recently I came across The Secret to Momentum is the 52-Week High??? on Alpha Architect, a blog I highly recommend on reading along with the quant mashup Quantocracy.. The article is a synopsis of research done comparing momentum vs. 52-week highs as ranking filters for a rotation strategy. A new idea I had not tried. What a great way to start the year, testing a new idea. Even though often they do not work out, one needs to be exploring all the time.

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