Using our three ETF models, Best(SPY-SH), Best1(Sector SPDR) and Best(SSO-TLT) equal weighted in a combination model, we demonstrate that the combo would have produced high annualized returns with low drawdowns and low volatility. Additionally, due to the very high liquidity of its component ETFs, the combo could support a huge portfolio size.
The simulated trading performance of the system is shown in Figure 1 below. The annualized return from January 2000 to end of December 2013 was 34.3%; $100 grew to $6,230 over this period. The maximum drawdown was -12.9% in October 2002. All values are with dividends reinvested.
The model assumes an initial investment on Jan-3,2000. It holds three ETFs, one from each component model. To December 31, 2013 there were 166 trades completed, 130 of these were winners and 16 losers, as listed in Table 3 in the Appendix. The percentage gains/losses shown in Table 3 include transaction costs of 0.1% of the trade amount arising from brokerage fees and slippage. The number of trades ranged from 4 to 19 per year, with the average being 12 trades per year.
Risk measures for Combo3 and for the component models are shown in Figure 7 in the Appendix. All risk measures for Combo3 are better than for the individual component models.
In above chart, the upper green graph is the performance ratio of the Combo3 to SPY. A rising trend of that graph indicates when Combo outperformed SPY; it produced about 38 times the value which one would have had from a buy-and-hold investment in SPY over the same period. One can see from the ratio graph that Combo3 out-performed SPY every year.
Annual performance from January to December ranged from a maximum of 73% for 2008 to a minimum of 16% for 2000 and 2001, as can be seen in Figure 2. There was never a loss over those periods.
Rolling 1-year returns
Figure 3 shows the rolling 1-year returns starting each trading day from 2000 to 2012. The minimum return over 12 months was 2.7% and the maximum was about 115%.
2-year performance from January to December ranged from a maximum of 180% for 2008-09 to a minimum of 38% for 2000-01, as can be seen in Figure 4.
Distribution of Monthly Returns
Figure 5 shows the distribution of monthly returns. There were a total of 168 months in the period under consideration. Combo3 produced positive returns during 127 months and only 41 months had negative returns, as is evident from the chart above. SPY had 73 months of negative returns.
Figure 6 shows graphically the investment periods for the various ETFs in Combo3, which are listed in Table 3.
To simulate savings over time, terminal values were calculated to the end of May 2013 for annual hypothetical investments of $1. Starting with a dollar during each of the 13 years from 2000 to 2012, one would have invested a total of $13 cumulatively by the end. Summing the 13 terminal values, this strategy would have netted this dollar-per-year investor $232 at the end of 13 years.
Following a buy-and-hold strategy in SPY, one would have only $22, about 9% of what Combo3 provided. Furthermore, the lowest annualized return, for any of the 14 time periods was 35% and the average for all the periods was 42%.
This is shown in Table 1 and 2 in the Appendix.
Correlation between component models
The correlation between the component models is fairly low, with 1.0 signifying 100% correlation.
Note: Based on the simulated past performance one could expect this combination model to continue to perform well. However, be aware that all performance results are hypothetical and the result of backtesting only. Out-of-sample performance may be much different. We can make no claims about future performance of this signal, which may include significant potential for losses.
Quick Links to Model Descriptions
iM(Gold) iM’s Best12(USMV)Q1..4-Investor Minimum Volatility Stocks (The Q3 model available to Silver)
R2G & iM(Silver) iM-Best(SPY-SH) Market Timing System: Gains for Up and Down Markets
R2G & iM(Gold) iM-Best1(Sector SPDR) Rotation System
R2G & iM(Gold) iM-Best(SSO-TLT) Switching System
Quick Links to Ready-2-Go Models
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