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Using ETF Replay's relative strength backtest system, an investor can backtest various user-defined ETF portfolios. I decided to test a very basic 3 ETF system that looks at the relative strength return of GLD (Gold), SPY (S&P 500), and SHY (Barclays' Low Duration Treasury ETF, a close substitute for cash). The strategy ranks the 3 ETFs based 40% on the 3 month return, 30% on the 20 day return, and 30% based on the 20 day volatility. The backtest started in 2005 (when GLD started trading) and rebalanced monthly. No commissions, slippage or taxes are assumed. The benchmark I used was buying and holding SPY.

The returns for a relative strength system that rotates between SPY, GLD, and SHY (cash) have been impressive over the past 5 years. The total return to date is 90.6% vs -1.1% for SPY. More impressive, the volatility for the system is 14.8% versus 23.7% for SPY.

The system made 37 changes or "trades" over the past 5+ years. GLD was held 34.8% of the time, SHY 37.3%, and SPY 27.9%. The current signal on April 30th was for GLD, switching from April's position SPY.

There are a number of variations an investor could use with the system as well as different ETF portfolios. For those interested in reading about relative strength ETF investing, there is also a new book available by Leslie Masonson Buy--DON'T Hold: Investing with ETFs Using Relative Strength to Increase Returns with Less Risk which is on my reading list.

Disclosure: No positions

Source: A Simple Relative Strength ETF Rotation System