Best2x4(S&P500 Min-Volatility) Variable Asset System with Minimum Volatility Stocks of the S&P 500

  • This model can hold 2 to 8 stocks, at variable weightings, selected by a ranking system from a minimum volatility stock universe of the S&P500.
  • The model has 8 equally weighted slots; a very high ranked stock could occupy a maximum of 4 slots, that is a nominal 50% weighting of the model’s total assets.
  • When adverse stock market conditions exist, the model reduces stock holdings by 50% and invests the proceeds in the -2x leveraged ProShares UltraShort S&P500 ETF (SDS).
  • The backtest produced a simulated average annual return of about 42% from Jan-2000 to end of June-2015 with a maximum draw-down of minus 19%.

The Minimum Volatility Stock Universe of the S&P 500

Minimum volatility stocks should exhibit lower drawdowns than the broader market and show reasonable returns over an extended period of time. It was found that a universe of stocks mainly from the Health Care, Consumer Staples and Utilities sectors satisfied those conditions.

This minimum volatility universe of the S&P 500 currently holds 117 large-cap stocks (market cap ranging from $4- to $277-billion), and there were 111 stocks in the universe at the inception of the model, in Jan-2000.

Trading Rules

The ranking system employed is the same as for our Best8(S&P500 Min-Volatility) system, but the trading system differs in regard to the hedge used and some additional sell rules.

The model assumes that stocks are bought and sold at the next day’s average of the Low and High price after a signal is generated. Variable slippage of about 0.12% of a trade amount was taken into account to provide for brokerage fees and transaction slippage.

Buy Rules:

  • Some of the largest market cap stocks are exclude from being selected.

Sell Rules:

  • Rank
  • Keep the weight of a position in a slot to +10% and -15% of the nominal weight.

Realized Trades Analysis

An analysis of all the realized trades is shown in Table 1. There were 505 winning trades out of 735, resulting in a win rate of 68.7%. The average yearly turnover was about 350%. On average a position was held for 83 days.

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Holdings

The models can potentially hold a maximum of 8 different stocks, and a minimum of 2 different stocks. As of July 16  it held 5 different stocks with various weights as shown in Table 2.

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Performance

In the figures below, the red graph represents the model and the blue graph shows the performance of benchmark SPY. The backtest period was 15.5 years, from January 2000 to June 2015.

Figures 1 to 5 show performance comparisons:

  • Figure 1: Performance 2000-2015 with market-timing and hedging with long SDS. The model uses a hedge ratio of 50% of current holdings during down-market conditions. (Note: The inception date of SDS was Jul-2006. Prior to this date values are “synthetic”, derived from the S&P 500.) Annualized Return= 42.0%, Max Drawdown= -18.7%.
  • Figure 2: Performance 2000-2015 without hedging. Annualized Return= 35.2%, Max Drawdown= -30.3%.
  • Figure 3: Performance 2000-2015 without hedging and market timing. Annualized Return= 30.3%, Max Drawdown= -56.5%.
  • Figure 4: Performance Jan-2000 to Jun-2015 . Annualized Return= 43.6%, Max Drawdown= -18.5%.
  • Figure 5: Performance Jul-2014 to Jun-2015. Total Return= 64.6%, Max Drawdown= -6.3%. This can be directly compared with our Best12(USMV)-Trader model’s return of 28.6% for the same time period, and SPY’s return of 9.8% for the same time period.

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Figures 6 to 10 show performance details from Jan-2000 to Dec-2014 for the model with hedging and market timing:

  • Figure 6: Performance versus SPY. Over the 15-year period $100 invested at inception would have grown to $17,122, which is 93-times what the same investment in SPY would have produced.
  • Figure 7: 1-year returns. Except for 2006 the 1-year returns were always higher than for SPY.
  • Figure 8: 1-year rolling returns. The minimum 1-year rolling return of the 3-day moving average was 2.0% early in 2007.
  • Figure 9: Distribution of monthly returns relative to SPY.
  • Figure 10: Risk measurements for 15.5-years and trailing 3-year periods.

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Following the Model

This model can be followed, exclusively, live at iMarketSignals where it will be updated weekly together with our other trading models. It will not be available as a subscription model at Portfolio 123.

Disclaimer

One should be aware that all results shown are from a simulation and not from actual trading. They are presented for informational and educational purposes only and shall not be construed as advice to invest in any assets. Out-of-sample performance may be much different. Backtesting results should be interpreted in light of differences between simulated performance and actual trading, and an understanding that past performance is no guarantee of future results. All investors should make investment choices based upon their own analysis of the asset, its expected returns and risks, or consult a financial adviser. The designer of this model is not a registered investment adviser.

 

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14 comments on “Best2x4(S&P500 Min-Volatility) Variable Asset System with Minimum Volatility Stocks of the S&P 500
  1. dom1102@aol.com says:

    WHERE DO U FIND UPDATED HOLINGS FOR THIS AND THE 3X4 PORTFOLIO THANX

  2. shpotts says:

    The portfolio seems to have 9 positions as of 11/16/15 rather than the nominal 8. Can you clarify the current signals? Thank you.

  3. MPD says:

    Hi, How do you define low volatility for Best2x4(S&P500 Min-Volatility) ? The reason I am asking is because I find using 100 day historical volatility as a nice way for me to work out how volatile a stock is. MNK a stock in this portfolio right now has a HV of 0.71 which under my definition of volatility means it is very high & not low.

    • geovrba says:

      Please see model description for our definition of the minimum volatility universe. There may be some stocks in this universe which are not necessarily min volatility stocks.

  4. vman says:

    Hi Georg and Anton

    Figure 1 above is for “Best 2×4(S&P500 Min-volatility), 50% SDS hedge, with Market Timing”. Quick questions:

    *50% SDS hedge indicates using SDS as a hedge in the % recommended in your weekly recommendations, right? A maximum of 50% of SDS is allowed when called for…correct?
    *What does ‘market timing’ mean? Using the MAC-US, something else?? Can figure it out.
    Many thanks
    Jim V

  5. geovrba says:

    This model can hold SDS with a maximum weighting of 50%.

    Please note that the weekly reports result from the the model’s algorithm and are not recommendations from us.

    The buy and sell rules in the model include simple moving average crossover rules using the benchmark SPY; this is referred to as market timing. There are also market timing rules for hedge entries and exits.

  6. vman says:

    Georg
    Understood. Thank you.

    Jim V

  7. imsacct says:

    Hi Georg and Anton,

    In which year did the Max Drawdown of -18.74% occur? What are the prospects for posting the yearly Max DD for this model?

    Much appreciation!

    • geovrba says:

      Max Drawdown of -18.74% occurred 10/3/2011.
      Yearly max D/D are not readily available but we can calculate them fairly soon.

      • geovrba says:

        iM-Best2x4(S&P500 Min-Volatility)
        Year max D/D
        2000 -13%
        2001 -12%
        2002 -15%
        2003 -11%
        2004 -15%
        2005 -6%
        2006 -13%
        2007 -12%
        2008 -16%
        2009 -10%
        2010 -11%
        2011 -19%
        2012 -9%
        2013 -6%
        2014 -8%
        2015 -14%

  8. imsacct says:

    Thank you so much, Georg!

  9. teammaui says:

    This last sell for 9/5 suggested .5x CI but portfolio didn’t hold any remaining shares but did however hold .5x of A not listed as current holdings.
    Please clarify,
    Thanks

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