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I was looking through a list of new ETFs launched this year and came across two funds I thought were interesting, the Russell 1000 High Beta ETF (HBTA) and the Russell 1000 Low Beta ETF (LBTA). I then did some research and found the underlying index for each fund, and developed a strategy to use for trading the two beta ETFs.

The strategy I came up with is as follows: take the Russell 1000 index chart and plot a 100 day Hull moving average and a 600 day Hull moving average, and when the 100 day moving average is above the 600 day moving average, allocate 90% to the Russell 1000 High Beta ETF, and 10% to the Russell 1000 Low Beta ETF. If the opposite occurs when the 100 day moving average is below the 600 day moving average, then the allocations are reversed, 90% to the low beta ETF, and 10% to the high beta ETF. The strategy is what I call intermediate term buy and hold, because using this strategy you would have made 11 trades in nearly 7 years, or about 1-2 trades per year, and the holding times vary from a couple months to around a year and a half.

The 90-10 strategy has outperformed the Russell 1000 index by 22.92% since the beginning of 2005. Also, another benefit is that the 90-10 strategy minimized the drawdown compared to if you would have just bought the Russell 1000 Index. The strategy works well when the short moving average crosses below the long moving average as described above, being overweight low beta softened the fall that occurred from late 2007 until March 2009. The reason for that is the top 3 sectors by weight in the index are consumer defensive, health care, and utilities, which tend to do better when the market is falling.

The strategy also works well when the short moving average crosses above long moving average because when that occurs the markets are moving upward, and being overweight the high beta would have outperformed from the stock market bottom in March 2009, until the end of October 2011. The reason for this outperformance is the top 3 sectors by weight in the index are industrials, technology, and energy, which tend to do better when the market is rising.

Statistics from the strategy

Return

Max draw from start

90-10 Strategy

45.90%

-21.90%

Russell 1000

22.98%

-38.06%

The following is a chart of the performance of the 90-10 strategy against the Russell 1000 Index with index data from January 3rd 2005, until October 31st 2011. The data from Russell Indexes website for the Russell 1000 Index, Russell 1000 High beta index, and the Russell 1000 Low beta index all included dividends.

The 90-10 Strategy did underperform from 2005 until the middle of 2007, but from the end of 2007 until the end of October this year the strategy has greatly outperformed the Russell 1000.


Source: Using Beta ETFs To Outperform The Market