In addition to a model that I will be updating that invests in market-cap weighted US stocks and individual countries, relative to cash and long-term Treasuries as a risk off mode, I will also be updating a model that is always long top sectors as determined by our model. The main difference between the two models is this second model does not have a risk off or cash mode. It is also non-diversified as it only invests in 6 ETF sectors at a time.
As you can see below from the ETFReplay.com backtest, the model has held up very well over time. Special consideration for the performance during the collapse of 2008 should be given as the model quickly rotated into Treasuries and other bond ETFs, which showed good relative strength compared to ETFs that focused on stocks:
While this hypothetical (this means these results were not realized, nor would it be likely for an investor to realize them as they do not factor in trading costs, taxes, spreads, fill prices etc. The results are only a guide for helping an investor determine what ETFs might be worth looking into further for investment purposes. This is not a recommendation to buy or sell these ETFs) model has not experienced a negative year, it has lagged the overall S&P 500 (SPY) for the past two years, notably due to the fact the US market has been stronger than International markets as well as bond markets. Over 10+ years, the return of the model at 384.8% vs. 130.4% for the S&P 500 is worth considering, especially in light of the fact that the volatility was 35% less. More importantly, the largest drawdown of the model is paltry at 13.1% compared to the S&P 500 experiencing a 55.2% drop.
As of June 28, the model was long:
(IEI) iShares 3-7 Year Treasury
(MBB) iShares MBS Bond
(VB) Vanguard Small Cap
(XLP) SPDR Select Consumer Staples
(XLV) SPDR Select Health Care
(XLY) SPDR Select Consumer Discretionary.
The return of these 6 ETFs through July 10, 2013 is +2.01% vs. +2.97% for the S&P 500. The volatility of the backtest is 4.3% vs. 6.9% for the index. While the test produced 32% less return, the volatility was 38% less.
I will try to update this portfolio every few weeks, but if an investor were looking at which ETF sectors are the strongest based on today's model readings, the top 6 ETFs as of the close on July 10th were:
(QQQ) Powershares QQQ
(RSP) Guggenheim S&P 500 Equal Weight
(VB) Vanguard Small Cap
(VO) Vanguard Mid-Cap
(XLF) SPDR Select Financial
(XLY) SPDR Select Consumer Discretionary
It is interesting to note that the model has eliminated more defensive names compared to just 2 weeks ago. Two Bond ETFs and defensive sectors like Health Care and Consumer Staples were replaced by two mid cap equivalents (RSP trades like a mid cap ETF), financial stocks, and technology stocks. This historically has meant that the market will see a risk on mode in the short term. Investors should consider adding to their stock allocations if they decided to put trust in the hypothetical past results of this model.