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A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003 | Seeking Alpha

An Annual Performance Of 41.4% Since 2003 | Seeking Alpha Portfolio Strategy A Global Market Rotation

A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003

Aug. 9, 2013 10:30 AM ET387 comments | 1 Like by: Frank Grossmann

Sounds too good to be true! My first contribution on Seeking Alpha.

Before I get started, let me introduce myself. My name is Frank Grossmann and I am living in Switzerland. Until recent, I used to work as a chief scientist for an international digital imaging company. They have incorporated my software algorithms for digital image processing, which I had developed in my company Colour-Science.com. These algorithms perform image enhancement, red eye removal, and face or general pattern detection. However, my passion was always to search for patterns in financial data and to develop and back test intelligent, rule-based investment strategies.

The following strategy is one of my favorite rotation strategies, which many of my friends, customers and I have used now for some years.

The Global Market Rotation Strategy (NYSE:GMR)

The GMR Strategy switches between 6 different ETFs on a monthly basis. The back tested return of this strategy since 2003 is quite impressive.

Annual performance (OTCPK:CAGR ) = 41.4% (S&P 500=8.4%) OTCPK:CAGR) = 41.4% (S&P 500=8.4%)

Total performance since 2003 = 3740% (S&P 500=134%)performance ( OTCPK:CAGR ) = 41.4% (S&P 500=8.4%) 69% of the monthly trades have positive return

69% of the monthly trades have positive return versus 31% with negative returnTotal performance since 2003 = 3740% (S&P 500=134%)

trades have positive return versus 31% with negative return

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A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003 | Seeking Alpha

These global markets and ETFs are:

US Market (MDY - S&P MidCap 400 SPDRs) MDY- S&P MidCap 400 SPDRs)

Europe (IEV - iShares S&P Europe 350 Index Fund IEV- iShares S&P Europe 350 Index Fund

Emerging Markets (EEM - iShares MSCI Emerging Markets) EEM- iShares MSCI Emerging Markets)

Latin America (ILF - iShares S&P Latin America) ILF- iShares S&P Latin America)

Pacific region (EPP - iShares MSCI Pacific ex-Japan) EPP - iShares MSCI Pacific ex-Japan)

During market corrections I invest in:

US Treasury Bonds (EDV - Vanguard Extended Duration Tsy (25+yr)) EDV- Vanguard Extended Duration Tsy (25+yr))

Cash or SHY (SHY - Barclays Low Duration US Treasury) SHY- Barclays Low Duration US Treasury)

For the design of a well performing rotation strategy, it is important that the selected ETFs are not too volatile, show longer-term visible trends and have a good market volume, so that they cannot be manipulated. They all should have more or less the same volatility. The 5 global markets ETFs fulfill this condition. They all are capitalized enough, so that they cannot be manipulated in the short term. They follow slightly different economic cycles and have long periods where one market outperforms the others until it becomes so overpriced and investors begin to remove their money from that market in order to invest in other cheaper valued markets.

Looking back 12 months, we see that the US market was the clear winner and the MDY S&P Midcaps performed +35%. In comparison, the ILF Latin America market lost nearly -10% and the more important EEM Emerging Markets ETF only made +3.5%. Rest assured that this outperforming will not continue forever. At one moment EEM, ILF or another ETF will bounce back and outperform the US market. This is the moment when I switch the ETFs.

However, switching between these markets alone is not enough to really get a good performance. By switching only between these 5 ETFs I would have made 21% annual return since 2003. Not too bad, compared to the 8.4% of the SPY S&P 500. But if I look at the charts, I recognize that during periods of big market corrections also all my 5 ETFs suffered big losses. Although these markets are globally distributed, the correlation between them is very high. The 60-day correlation is mostly higher than 0.75. This means there is no way to escape a market correction like the subprime crash in 2008 when the S&P 500 lost nearly 55%. To avoid this scenario, we would need to switch to some negatively correlated assets. The best are US Treasuries and if they do not work, then cash is an option as well.

Based on my strategy back tests, I have chosen the EDV - Vanguard Extended Duration Treasuries (25+yr) ETF. At the moment, due to rising yields, the correlation to the S&P500 is nearly 0 which is quite abnormal. Normally the correlation is between -0.5 and -0.75.

9/7/2018

A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003 | Seeking Alpha

However, I am sure that during a future market correction these correlations will go down very quickly.

When designing a good rotation strategy, the Return to Risk ratio (Sharpe-Ratio) is one of the most important numbers. The higher it is, the more return you will get for the risk you have within your investment.

Return to Risk ratio (Sharpe ratio)

Strategy (investment 2003 - today)

Sharpe ratio

Volatility

Annual return

SPY S&P 500 investment

0.38

20.3%

8.6%

5

Global Markets alone

0.73

28%

21.3%

5

Global Markets + Cash exit

1.25

23.3%

33.8%

5

Global Markets + Treasury

1.38

25.6%

41.4%

AGG - iShares Core Total US Bond (4-

0.40

5.4%

4.3%

5yr)

As you can see, a good rotation strategy is always better than the other strategies. Many conservative and cautious investors think that they have a small risk investing in a bond ETF like the AGG. However, if you compare the Sharpe ratio, you recognize that an SPY investment has about the same risk under the condition, that you invest only half your money and keep the rest in cash. The SPY investment return would be the same, because the annual performance was exactly twice the annual AGG performance.

With the Global Market Rotation strategy, you can reduce your risk and your volatility easily by just keeping a good part of your money in cash or short-term bonds.

Even if the volatility of 25.6% seems a little bit high, this does not mean that the strategy is risky. The 25.6% is the medium 20-day volatility since 2003, which is slightly higher because of the switching between the ETFs. However, it is much more important, what happens during a market correction. Here my strategy showed its strength in the past. During the S&P 500 market crash in 2008, the strategy produced a solid return of 55.5% while the S&P 500 was -36.8% down by the end of the year.

I consider such a strategy as quite a save, because the strategy will avoid big losses during market corrections. It will always switch quite early into treasuries or into cash for the case that treasuries would not anymore play the role of a safe haven asset.

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A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003 | Seeking Alpha

Annual performance of the Global Market Rotation Strategy

Year

GMR performance

S&P 500 performance

2003

34.9%

28.2%

2004

24.6%

10.7%

2005

36.8%

4.8%

2006

39.4%

15.8%

2007

38.5%

5.1%

2008

55.4%

-36.8%

2009

56.7%

26.4%

2010

40.0%

15.1%

2011

89.4%

1.9%

2012

14.2%

16%

2013 until end July

19.4%

21.2%

How to rotate the ETFs

I rotate or switch the ETFs on a monthly basis. Every month I calculate a ranking of the 6 ETFs and based on the results I invest in the best ETF for the next coming month. I use a software, which I have written in Mathlab, to find out which the best look back period a and the best investment period b is. The period b will give me my investment return. The software just varies the look back period a between 1 week to 12 months for investment periods b of 2 weeks to 3 months. The software just loops through 10 years of historical price data and outputs a scatter diagram, which shows which a and b periods give the best positive return. The result is a 3 dimensional mountain diagram, which highlights the best periods. The investment period b is less critical than a. However b should always be shorter than a. One month for b is a good value for our 5 ETFs. The look back period a can make big differences. However, a normally lies somewhere between 1 and 5 months.

9/7/2018

A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003 | Seeking Alpha

An Annual Performance Of 41.4% Since 2003 | Seeking Alpha My Mathlab method is very interesting

My Mathlab method is very interesting to test if an ETF can be used for a rotation or a trend following strategy. You cannot use an ETF if you cannot find a look back-investment period pair, which gives you a stable positive return. Also for some ETFs you get completely different returns, only by changing the parameter a little bit. Such ETFs are also not good for rotation strategies.

For example, it is nearly impossible to design good rotation strategies for commodities. They are too volatile and they can be very easily manipulated. Also, if you look back a and investment periods b are too short, it becomes difficult to achieve positive returns. The shorter the periods are, the more your performance becomes a function of the random market noise which overlays existing trends. This is why I am not a friend of intraday trading. In addition intraday trading is really a hard work. I'd rather make money without being shackled to a computer screen the whole day.

For the ranking, I also use the volatility of the ETFs. While this is not so important for the 5 Global market ETFs, it is important to lower the EDV ranking a little bit, according to the higher volatility of the EDV ETF. EDV has a medium 20-day volatility, which is roughly 50% higher than the volatility of the 5 global market ETFs. This results in higher spikes during small market turbulence and the model would switch too early between shares (our 5 ETFs) and treasuries .

This probably sounds now very complicated, but if you want to play this strategy on your own, you can get quite good results by just looking at the 3-month historical performance and then always invest the next month in the best of the 6 ETFs. This is something you can do easily by yourself. You will still make about 34% annual return per year. The additional annual return I get for these complicated calculations, however, is +7.4% which is also not too bad.

Here is an example of the investments since September 2012

Date

Portfolio

GMR

S&P 500

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A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003 | Seeking Alpha

month

ETF

monthly return

monthly return

Sep.2012

EPP

2.8%

2.5%

Oct.2012

EPP

2.5%

-1.8%

Nov.2012

EPP

1.8%

0.6%

Dec.2012

EPP

3.8%

0.9%

Jan.2013

EPP

3.5%

5.1%

Feb.2013

MDY

0.8%

1.3%

Mar.2013

MDY

4.8%

3.8%

Apr.2013

MDY

0.6%

1.9%

May.2013

MDY

2.3%

2.4%

Jun.2013

MDY

-2.3%

-1.3%

Jul.2013

MDY

6.7%

4.8%

As you can see, since January the strategy is invested in MDY. It is not necessary to switch the ETFs every month. I would say that you have to switch all 2-3 month on average. In addition, instead of buying the ETFs, you can buy Comex futures for some of the ETFs. This is what I do. It is the case for MDY and IEV (Europe). Instead of the EDV you can buy Ultra-TBonds, which are similar to the TLT ETF, but you have to buy about 1.5x your normal investment because EDV behaves like a 1.5x leveraged Ultra-TBond.

Disclosure: I am long MDY, ZIV, SLV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Comments (387)

9/7/2018

A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003 | Seeking Alpha

With 3 month look back you get 33.3% CAGR with Sharpe of 1.16 and Sortino of 2.84 and maximum drawdown of

19%, which is excellent. However, the 2012 and 2013YTD returns are not that great (about 1%).

Using TLT instead of EDV gives you a CAGR 31%, Sharpe of 1.26, Sortino 2.95 (wow!) and drawdown of 17% but

with 2012 and YTD returns of 8% and 17% respectively. Excellent.

Even without the TLT and EDV you get respectable CAGR in the 15-20% range but with high losses in 2008 and

2011. Using TLT here is what I call polygamous paired switching, a natural extension of paired switching.

I would not suggest the optimization as that might lead to overfitting.

(I buy on the first trading day of the month on the basis of the return calculated from adjusted closing prices on the

last trading days of the fourth month and first month prior to the current month. For example, on the first trading

day of May I use the adjusted closing prices on the last trading days of January and April.)

I use a script in Mathnium.

09 Aug 2013, 10:54 AM

Frank Grossmann, Contributor

Author’s reply »

the 5 global markets be a truck speeding down the highway. Now I am following close with my car and my

car has one of these new automatic brake systems which brake automatically to avoid a crash. These

braking systems measure the distance to the car in front of you. Such a control system has a gain setting

which has to be fine tuned very well. If the gain is too low, the car will not brake enough. If the gain is to

high the car will begin to brake hard and accelerate which will cause oscillation.

You can tune the gain of the treasury by selecting the duration of the treasury. Duration is like a leverage.

If you choose a short duration Treasury it will take too long to switch and you will suffer losses at a sudden

The Treasuries plays the role of automatic braking system of a rotation strategy. Think of

market correction. If the duration or also leverage is too high you will switch too early which results in buy

high sell low.

Here I tried all Treasuries from SHY, IEI TLH, TLT, EDV, and leveraged Treasuries and EDV had the best

"gain" for the "automatic brake system".

10 Aug 2013, 12:18 PM

varan Of course. TLT does wonders for tactical strategies.

10 Aug 2013, 06:19 PM

darrenstory What about using ZROZ rather than EDV and/or TLT?

31 Oct 2013, 12:51 PM

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A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003 | Seeking Alpha

Thanks for sharing, Frank. And welcome to the community.

09

Aug 2013, 11:14 AM

Frank Grossmann, Contributor

Author’s reply »

good idea to use futures data however most people rather invest in ETF's and they believe more in

strategies which are directly derived from the ETF's they invest.

I mostly calculate my strategies with ETF's but if ever possible I will trade futures. It is a

10 Aug 2013, 12:18 PM

Hi Frank,

Thank you for sharing this very interesting result.

Very good job!

There are two points I am not sure if I understand correctly.

Would you kindly help?

1. In ranking, are you only using last "a" day's volatility as ranking criteria? Or some other performance measure,

like information ratio ?

2. How do you determine it's time to switch from equity to "bond"?

09 Aug 2013, 11:23 AM

Frank Grossmann, Contributor

Author’s reply »

For the ranking I calculate the 3 month performance of all ETF's and normalise between 0-1. The best will

have 1. Then I calculate the medium 3 month 20 day volatility and also normalize from 0-1.

Then I used Ranking= 0.7*performance +0.3*volatility.

This will give me a ranking from 0-1 from which I will take the best.

You can use the 20 day volatility averaged over 3 month.

10 Aug 2013, 12:18 PM

Baboon Performance can be negative actually, < 0.

10 Aug 2013, 01:55 PM

Ironmjolnir Would you mind explaining why you used 0.7 and 0.3 as the values you multiplied performance and

volatility against as opposed to, say, a 60-40 or 50-50 split?

12 Aug 2013, 12:43 PM

Hello Frank,

Thank you for the very interesting paper.

I have two questions:

9/7/2018

A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003 | Seeking Alpha

1.How did you do back testing up to December 2002, if two of ETFs in your strategy have been insepted

after that: EDV- on 10/6/2007 and EEM-on 4/7/2003?

2.Is there a special reason to use equation above for introduction of volatility in your ranking (0.7 *

performance +0.3*volatility)?

Could you use directly Sharpe ratio instead which is ~ performance/ volatility?

Thank you

09 Sep 2014, 11:18 AM

thjames did you get an answer to this? maybe he used funds or index instead?

23 Feb 2015, 12:03 AM

Excellent work.

Not having access to the exact algorithm, 3 month momentum strategy is the available option to the readers. How

does 3 month momentum strategy compare to other periods, say 1, 6 and 12months? If you are thinking about

updating this work in the future, you may want to include max drawdown, frequency of trades and Sharpe Ratio

for the sake of competeness. Also curious to see if REIT index etf would be a contender to this portfolio?

09 Aug 2013, 11:59 AM

Frank Grossmann, Contributor

Author’s reply »

strategy performed 55% versus -36.8 for SPY.

I had 69% winning periods with an average return of 4.53% and 31% loosing periods ith a medium loss of

2.3%. Sharpe ratio = 1.37.

I do not think it would be good to include a REIT index. Never iinclude a single ETF you know that it

performed well in the past. This would be a sort of cheating. I could also add Google, Facebook and Apple

to increase the return of my strategy

Max drawdown was 31% versus 55 for SPY in 2008 however by end of 2008 the

10 Aug 2013, 12:18 PM

Ian Farbrother Interesting article, Frank.

I did some work on swapping strategies like this a couple of years ago (using ETFReplay.com). One of the

conclusions I came to at the time was to be very cautious about 10-year backtesting. It was very easy to get great

returns from 2003-2008 if you included Brazil (EWZ) in the mix during that period - and then managed to switch

out before the crash (and, of course, your ILF captured most of that). Going to EDV during the crash certainly

helped!

However, I do find that you have an interesting set of ETF choices here, in particular, using EDV and EPP. I

basically gave up on finding a good strategy in 2011, when 'everything' just seemed to be chopping around,

making it difficult to not get whipsawed every month. It seems as though EDV again came to your 'rescue' then.

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A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003 | Seeking Alpha

I remain cautious about the idea of committing my whole portfolio to this kind of strategy - especially when picking

only one ETF per period - but am thinking of perhaps trying it out on a portion of the portfolio to see how it goes.

In any case, look forward to reading more of your articles. Like rasadagopan I would like to see more info,

especially max drawdown.

Thanks, Ian

09 Aug 2013, 01:58 PM

Frank Grossmann, Contributor

Author’s reply »

However 2008-2013 none of the markets outperformed in such a way and the annual performance was

47% which is even higher then for the 2003-2008 cycle. I think these markets fit well together for a

switching strategy and the most important is that the Treasury switch works well to avoid market crashes.

You are right. Latin America ILF outperformed the other markets from 2003-2008.

10 Aug 2013, 12:18 PM

extremebanker Nice article Frank:

I track about 20 ETF's. Update monthly to the four to seven that are best performng. Also, I have recently started

going short on the worse performing funds. My criteria are quite simple. Long on funds with high relative strength

and above 200 day average. Short on funds with low relative strength and below their 200 day average.

I alter the long/short ratio as the market goes up/down.

09 Aug 2013, 03:20 PM

Frank Grossmann, Contributor

Author’s reply »

could never get good returns. The main problem is that on long terms these ETF's all have a positive

return. If I make a equally balanced portfolio of all 5 ETF's, then I get 14.4% average annual performance

since 2003. This will successfully kill every short strategy.

I made a lot of tests going short on the worst ETF of my rotation strategies, however I

10 Aug 2013, 12:14 PM

extremebanker I agree that trying to short as a hedge is too expensive to be beneficial. At least that has been my

experience. I would never short something that is in a long term uptrend and performing reasonably well.

However, there are sectors of the market that are not performing well. Such as Brasil. It can be profitable

to short these sectors when they are in a downtrend. It also can help serve as some hedge against a

falling market. But that should not be the primary reason to short.

19 Aug 2013, 08:41 AM

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A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003 | Seeking Alpha

The bigger question is what's the real secret behind so much out-performance? (other than data mining) The only

feasible explanation I can imagine is that this strategy will not always beat the market. I would go out on a limb

and predict that it would under-perform going forward due to regression to the mean.

09 Aug 2013, 11:48 PM

Dorky Everything regresses to the mean, but nothing stays at the mean for long and that's one reason why I

believe the author's work will continue to outperform.

10 Aug 2013, 09:52 AM

Frank Grossmann, Contributor

Author’s reply »

fits better. You can not combine well ETF's which have too different volatilities.

Most of the outperformance was generated by escaping all big market corrections and I think that should

also work in the future.

SPY is much less volatile than the other 4 ETF's. MDY is more volatile than the SPY and

10 Aug 2013, 12:14 PM

Ehoser I agree, escaping corrections is the key. Buy-and-holders always point out that if you miss the XXX

strongest days your gains will greatly suffer. In The Age Of Deleveraging Gary Shilling points out that you

do much better if you can avoid the weakest XXX days. (But he doesn't say how to do it.) A short version

of his chart for best/worst 50 months on the S&P500 from 1946 to 2010 ( I hope the formatting is

readable):

Best 50 | Worst 50 | Avg Annual Return

long | long | 8.7%

out | long | 3.0%

long | out | 15.5%

10 Aug 2013, 05:18 PM

caedmon If you only recalculate and choose investments on a monthly basis, how do you escape all big market

corrections? If, say, you recalculate on October 2nd and the market drops 50% from October 4th to

October 12th, how do you avoid that in this strategy?

14 Oct 2013, 12:55 PM

berry In a drop like that, the market would close and he wouldn't have to.

14 Oct 2013, 01:05 PM

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A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003 | Seeking Alpha

The market dropped 40-60% in a matter of days after both 9/11 and the financial crises of 2008. These

things don't happen over months, my question is perfectly valid.

14 Oct 2013, 01:10 PM

caedmon I should note that I'll be his next customer if this can be avoided/solved to my satisfaction in his system.

14 Oct 2013, 01:11 PM

berry How did the market drop 40-60% following 911 if it was closed (as it was)?

In total it dropped around 12% and recovered most of that by the end of the month.

Look at the charts he has published on his web site to follow gains/losses.

14 Oct 2013, 01:20 PM

caedmon Look at this chart and then think your responses over again carefully: http://yhoo.it/1gF5mZZ Why am I

talking to you? The drops are obvious (and I lived them). Who cares if the market closes for a day when

the world is shaken or it reaches the 10% limit or whatever, two days of that and you're down 19%.

Downplaying the risks and how fast the market can move doesn't help anyone.

14 Oct 2013, 02:12 PM

berry If you can show me a one week fall of 40% to 60% as you stated, you may have a point.

The market fell a total of 14.1% following 911 (where it was closed for a week, not one day), and had

regained about half of that in the same month and almost all one month later.

Actually, it would be better if you didn't talk to anyone until you get your facts correct.

Vist his site where you can see his results.

Annual performance (CAGR) = 42.2% (S&P500=8.3%)

Total performance since 2003 = 4273.6% (S&P500=135.5%)

Volatility = 25.6% (S&P500=20.2%)

Maximal Drawdown = 31.1% (S&P500=55.2%)

Sharpe Ratio = 1.4 (S&P500=0.37)

He admits to a maximum drawdown of 31.1%. If you're looking for total safety, you will never achieve

excellent returns.

cheers

P.S. Your chart won't show for a lot of people.

14 Oct 2013, 02:16 PM

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A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003 | Seeking Alpha

varan Of course anything can happen, but the maximum drawdown (based on monthly data) of this strategy is

only 19%. There is only one balanced fund VWINX among so many that has a lower drawdown, though

balanced funds are designed for the ostensible purpose of reducing the drawdowns.

14 Oct 2013, 02:28 PM

S&P 500:

Week of September 15, 2008: 1255

Week of September 22, 2008: 1213

Week of September 29, 2008: 1099

Week of October 6, 2008: 899

1 Month drop of 39%. 1 Week drops of 11% and 18%. There are numerous other single week and

monthly/inter-month examples in the S&P chart. Yes it wasn't a single day, if you're being a stickler, but

the issue I was questioning still needs to be addressed. I do feel that I've wasted quite a bit of time making

a point that should have been obvious.

That aside, I'm highly suspicious of this strategy due to the way his worst results have been in the last two

years (more easily verified), while the best results were before that when no one had heard of him. If

someone can actually build an algorithm that works similarly and show us the nuts and bolts rather than

selling it to us, that'd be highly interesting!

15 Oct 2013, 02:34 PM

varan "[ ]his worst results have been in the last two years

"

That's not quite correct. 2012 was bad, but 2013 has been just fine.

2003 42.66%

2004 21.84%

2005 61.50%

2006 29.56%

2007 24.30%

2008 13.30%

2009 103.33%

2010 10.57%

2011 32.39%

2012 6.51%

2013 21.51%

Using IJJ, IEV, EEM, ILF, EPP and TLT.

If you use MVV instead of IJJ

2007 30.47%

2008 13.55%

2009 109.62%

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A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003 | Seeking Alpha

2010 37.56%

2011 52.06%

2012 17.39%

2013 28.62%

Not bad at all.

15 Oct 2013, 02:50 PM

berry caedmon said "The market dropped 40-60% in a matter of days after both 9/11 and the financial crises of

2008. These things don't happen over months, my question is perfectly valid. "

I'm still waiting for some verification of this assertion.

caedmon said "S&P 500:

Week of September 15, 2008: 1255

Week of September 22, 2008: 1213

Week of September 29, 2008: 1099

Week of October 6, 2008: 899"

Once again, did you bother to look at his results? His strategy had us in EDV which showed results much

different than what you've reported, You can't take some arbitrary market result and blame it on him, if he

wasn't even in the referenced market. Seems as if his strategy was already working. And he does show a

one month drop of 21.5% (not quite the 40-60% you assert) in Jan 2009. He's not trying to hide anything.

caedmon said " I do feel that I've wasted quite a bit of time making a point that should have been obvious.

"

I

feel the same way. Once again, PLEASE check your facts.

15 Oct 2013, 05:20 PM

Elran Varan did you test it yourself ? or do you rely on Frank's tests.

I did my own tests with 3 month momentum and got much different results , look at my comments in the

bottom of the comments page.

15 Oct 2013, 06:38 PM

I did my own tests. Of course.

15 Oct 2013, 06:49 PM

Elran, my tests, using only 3 months total return and the following ETFs (EDV EEM EPP IEV ILF MDY

SHY) give me a 21% CAGR from 2004. There is a 5% loss in 2012 but YTD the results are a 14% gain.

Good, but far from Frank's results (although I did not use volatility at all so there should be a difference).

16 Oct 2013, 09:04 AM

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A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003 | Seeking Alpha

Baboon What is the permitted drop?

16 Oct 2013, 11:58 AM

varan Where did you get your data? Testing based on the Yahoo data even with your ETFs yields entirely

different results

2004 18.41%

2005 54.19%

2006 29.80%

2007 24.30%

2008 21.06%

2009 57.19%

2010 13.45%

2011 42.97%

2012 1.54%

2013 3.81%

CAGR 25.95%

Here are some details.

On first trading day of every month: use the adjusted close prices on the last trading day of the previous

month and the last trading day of the month three month prior (Sept to Dec for Jan 1, Oct to Jan for Feb 1,

and so on) to compute the return for each. Buy the one with the highest return at the closing of the first

trading day of the month. Use adjusted close data which takes into account any dividends.

16 Oct 2013, 12:08 PM

Varan, I used data from ETFscreen.com. You are right, I made a typing mistake. I meant 27% CAGR

instead of 21% from 2004.

This is the backtest for the last five years (the website would not allow me to publish any other date).

16 Oct 2013, 04:33 PM

Elran That's the results i get about ~18% CAGR from 2003 , Frank claims " A simple MDY-EDV rotation with 3M

look back is already performing 20% since 2003" this is also not what i got .

Maybe he uses dividend adjusted prices but it will on add 2-3% ,

I cannot see how he gets 41% .

I also tried running my own trend algorithm that work great with sectors it did about 23% .

I did also a crystal ball testing - which means that i back-tested the perfect switch as if i had information

about the future - i got 48%.

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That means that if you were a prophet you would get only 48% , so i cannot see how momentum strategy

which has only limited prediction power can achieve 41%.

17 Oct 2013, 05:51 AM

Elran OK , i simulated on a Monthly basis (not weekly basis like before) , and used end of month data , indeed

the CAGR ~ 29%.

It is strange that simulation 12 weeks momentum is very different from 3 moths momentum.

Maybe the 3 months momentum has less noise in it.

17 Oct 2013, 06:26 AM

FYI - the market was already trending down leading up to Sept 11, 2011.

The DOW closed at 9,645 on Sept 10, opened on Sept 17 at 9,050 and then reached a mid day low of

7,950 on Spet 21, while closing at 8,280.

So, if you want to count Sept 11, 2011 as the issue then the specific terrorist action from Sept 11 to the

2011 lows was a drop of maybe 15%. Expanding the picture to be more fair and to not chalk up the

market to any single event (recency bias will get you everytime) the previous recent market peak was in

September of 2000 somewhere around 11,400. Previous to that you are going back to the tech crash era

of the DOW near 11,800 in spring of 2000 with the index bouncing all over the place after that.

Sept 11, 2001 was a little impact in an already poorly performing market. If you chart if from the longer

term you will see that by the mid 1999s that we hit somewhat of a peak that would be teased a few times

that lasted for 7 years before being broken for a couple of years and then rebroke (after 2008/2009 crash)

in 2012 with, hopefully no reason to go back that low.

All that aside, using this strategy, or any other that helps you avoid the biggest dips by moving into sectors

or areas with larger potential gives you the net effect of buying low and selling high. If something is

already fairly valued or undervalued it will, much more often than not, be punished less during a pullback

that things that are over valued. Which is why this works over the longhaul

24 Oct 2013, 01:18 PM

varan No strategy like this can account for singular events like 9/11.

24 Oct 2013, 01:22 PM

I am not sure if that link you posted was supposed to show the S&P back to the 1950s and starting at

around $16 per share, but it did.

That chart should give you confidence about how insignificant the dips are. Cripes, it ends at 1,800 from a

start of 16. Looks like boring indexing is ok, huh? Throw in even a little avoidance of bad markets and you

will be fine, or just ride out the storm and end with 100X more than what you initially invested or more if

you add to it.

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The very evidence that you think supports your argument should actually make you feel ok about the

longer term performance.

If the short-term worries you then use a bucket strategy. Have three buckets. One for short-term 1-3 year

money, one for medium term 5 to 10 year money, and one for long-term 10 to forever money.

You trim gains in the long term bucket to keep the middle-term bucket topped off and you use the middle

term bucket profits that you trim to refill the short-term buckets. This allows you to ride out anything less a

total financial collapse of the world.

24 Oct 2013, 01:22 PM

With downward market already, wouldn't you have been out of SP500 at the time of 9/11?

01 Nov 2013, 04:28 PM

berry We're never in SP500, and yes, the strategy was out of the US market (MDY) and in EDV.

01 Nov 2013, 05:28 PM

Check charts over 5 plus years. MDY beats SPY.

18 Nov 2013, 08:52 AM

I have done the 'prophet' experiment as well, and I come to different results. In addition I did a Monte

Carlo simulation.

Here are the results:

Buy best ETF every month: 113.5% CAGR (~4000 times your money after 11 years!)

Buy worst ETF every month: -40.3% CAGR

Buy random ETF every month: 13.5% CAGR (median of 1000 runs)

Min: -1.78%, Percentiles 25/75: 10.32%/17.07%, Max: 28.77%

Symbols: MDY, FEZ, EEM, ILF, EPP, EDV, SHY

Period: 2003-01 - 2013-12

Full monthly listing of best/worst ETF experiment: http://txt.do/1rcl

06 Jan 2014, 08:04 PM

vn888:"Full monthly listing of best/worst ETF experiment".

S2L: I'm sorry I must have missed the practical implications of your post and link.

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Care to spell it out for me?

thx

06 Jan 2014, 08:43 PM

@satan2liberals:

My post was in response to that of Elran on 17 Oct 2013, 05:51 AM, where 48% CAGR was reported for

crystal ball / prophet testing, i.e. you use knowledge of the future to pick the winner every month.

48% CAGR sounded low to me, so I did the experiment myself and came up with another number

(113.5%). This is useful, since it sets an upper limit for how well you can do (given the monthly period and

the chosen ETFs). Besides knowing how much more potential you have, you could also to some extent

use this to judge whether your system is performing as when you backtested it. E.g. if you normally are at

41%/113% = 36% of perfect CAGR, then you should expect to harvest 36% of the market potential in the

future, the point being that the market potential may vary over time, so you shouldn't expect 41% CAGR

every year.

While I was at it, it was pretty easy to pick the worst ETF to see how bad you could do. Not so useful

maybe

The final (Monte Carlo) experiment you could call the monkey experiment, i.e. you let a monkey pick the

ETF every month. If your backtest is not significantly better than a monkey, then maybe you should just

toss a coin every month :-)

The link was included for people wanting to verify my results.

07 Jan 2014, 07:43 PM

Doug+Taylor+ Hi vn88 you only took their performance for the previous month to select for the current month in your

113% CAGR ?

Thanks

07 Jan 2014, 08:21 PM

@Doug12:

No, I don't look back, I look forward (not possible in real life of course): Every end of the month (e.g. 31-

Dec-2013) I look into the *future* to see which ETF will perform the best until the next end of month (e.g.

31-Jan-2014). This is why Elran called it crystal ball testing or being a prophet.

08 Jan 2014, 06:23 PM

Varan,

Whre did you get data from for EDV for back test sinse 2004?

EDV was lonched on Dec6,2007 according Yahoo.

Thank you

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11

Sep 2014, 11:38 AM

berry Most backtest for periods before an ETF was introduced simply omit that ETF for periods before it was

introduced, thus for periods before EDV became an ETF, it is not included in the tests.

Some people backtest using what they consider to be an "equivalent", but in most of those cases they

mention what equivalents were employed.

The composition of the funds may change over time also. If you'll look at Franks tests, he formerly used

IEV where he now uses FEZ. It makes for an interesting challenge attempting to duplicate results :)

11 Sep 2014, 12:13 PM

Dorky Simple approach to a great analysis, and much better than LTCM (it never survive beyond its 3rd year despite

similar 40%+ return per annum) and its bunch of professors.

10 Aug 2013, 09:50 AM

I think as long as ETFs you use in this allocation were high gainers over period you studied, you win during this

decade long analysis. I can only question overlap between EEM and some of its cousins - Asia ex Japan and

Latin America. So in similar light to others - how about REIT s, commodities, volatility based ETFs (including VQT)

in this allocation? Frontier markets like FRO?

11 Aug 2013, 10:59 AM

Frank Grossmann, Contributor

Author’s reply »

PMNA - PowerShares MENA Frontier Markets

GULF - WisdomTree Middle East Dividend Index

FM - iShares MSCI Frontier Markets ETF

and others.

I agree that these markets probably will be top performers for the next years.

However the problem is that they have very small assets and volume and most only started in 2008 or

later, which does not allow to do backtests. Also some are very volatile.

I will make probably sense to add always one of them together with the top of the 5 bigger ETF's. Also if

you want to get a good return from such a strategy it is not really necessary to have the future top

performers in your strategy. It is much more important that you can escape the next market crash.

I already did tests including ETF's like

12 Aug 2013, 02:50 AM

Great reply, thanks Frank. I just want to point you towards VQT (SP500 with VIX hedging ETN) and

PHDG (SP500 with VIX hedging ETF) as other possibilities. In its prospectus, VQT is backtested at least

10 years, so that data is available.

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12

Aug 2013, 10:54 PM

Frank Grossmann, Contributor

Author’s reply »

bit of hedging eats half of the SP500 performance. The price is way too high because of the 10%

contango of the VIX front futures

Also if you have Treasuries and cash in your rotation strategy you do not need a hedge.

I do not like VQT I would never hedge continuously using VIX futures or options. A little

However I like very much inverse VIX ETFs like ZIV.

13 Aug 2013, 04:42 PM

Actually the drag of VIX on performance of VQT/PHDG aren't that great in the right market environment -

if the market is rising and in 'stable' VIX pattern, as little as 2.5% is allocated to VIX holdings. The other

alternative is too buy these hedges only when market starts to correct - dependent on timing and speed of

correction, as little as 5% correction (typically 10%) is needed to activate the VIX safety net.

15 Aug 2013, 11:42 PM

Frank Grossmann, Contributor

Author’s reply »

VXZ. However even with very sensitive switching I always lost because of the huge 10% monthly

contango.

I tried to replace my (normally) negative correlated Treasuries with VIX ETFs like VXX or

19 Aug 2013, 08:12 AM

Mikegyver Great article and interesting approach. I like it because it is simple and makes sense to me. I am getting ready to

roll over a 401k into an IRA and have been researching the best ways to maximize return with reduced risk. I

would take this over a 60/40 equity to bond strategy.

11 Aug 2013, 11:31 AM

Similar to the Scott investment portfolios on the IVY portfolio strategies (Faber). I did a bit of research on the

concept & as Ian stated it's easy to get excellent results backtesting with certain ETFs included in the mix.

Thanks for sharing -

11 Aug 2013, 07:12 PM

Frank Grossmann, Contributor

Author’s reply »

enhance the result of my strategy. If I compose an equally weighted portfolio of these 5 ETF's then the

back test chart since 2003 is nearly 100% identical to the ACWI ETF (iShares MSCI All-World ACWI

Index). Both would have about 3% annual performance and a maximum draw down of about nearly 60%.

This shows you that here you are trading an all-world selection.

It would be cheating If I would preselect some historically well performing ETF's just to

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You also see that the strategy did very well in selecting the good ETF's to achieve a annual return of 41%

instead of 3% for an equal mix of the 5 ETF's.

12 Aug 2013, 06:35 AM

Hi Frank,

Great article. Thanks for sharing this.

11 Aug 2013, 10:57 PM

Hello,

Thanks for a fine article. Certainly got me thinking.

You mention you and some friends have used it for a number of years. Does your "real world" experience match

the Annual Performance table? What period does your real world experience cover?

cheers

12 Aug 2013, 08:03 AM

Frank Grossmann, Contributor

Author’s reply »

comparison to cash stop. However I was using country rotation for about 8 years. Today I think that the

return to risk ratio of a country rotation is less good, because sometimes country indexes can crash very

fast. Since 2011 I invest in inverse volatility. I think this is the most rewarding investment you can do at the

moment. I have some strategies explained at my logical-invest.com website

I am investing in this strategy since 2010, however at the beginning with only a

13 Aug 2013, 05:54 AM

Thanks for a great Article , I have read so many articles but found yours most promising yet implementable by

individuals.

How would the results be, if we use 1 month performance vs 3 month performance ( to catch trends a bit early to

minimize losses as markets drop a lot faster & quickly) and make a switch to the best performing ETF whenever

we find a leader ( best performer) vs waiting for a fixed period of 1 month?

It will be great to know if you performed this combination .

congratulations for your work.

12 Aug 2013, 10:36 AM

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the first part of the year, which was highly volatile.

I think it is also important to consider volatility, as Frank obviously does with his Matlab algorithms.

Unfortunately, I wasn't able to really understand how he uses that in relation to the trailing performance

metrics.

12 Aug 2013, 06:15 PM

Shefali,

I've backtested a number of momentum ETF based strategies on 1 month look back approach - and their

performance is inferior to this. In fact, Frank has probably backtested multiple variations of look back

approaches and I'm betting this is one of the better ones. In fact, 4 or 5 months look back approach - if

right ETFs are chosen - may provide even better returns. I can tell you that strategies with look back over

6 months in my hands have also underperformed. It's about catching the right window - probably

somewhere between 50 and 200 day moving averages.

12 Aug 2013, 10:58 PM

HI RM ,

Great to know, is there a back test on the strategy to switch to the leader based on the trailing 1 month

performance Vs 1 month performance at a fixed date.

In essence :

To check the prices for trailing 1 month, if the leader changes based on the trailing 1 month performance,

then switch.

This strategy may be able to capture flow of funds on a more dynamic basis although could be at the

expense of more frequent trades in a choppy market

declining/ rising markets.

but may lead to much better performance in the fast

13 Aug 2013, 03:41 AM

Frank Grossmann, Contributor

Author’s reply »

Here is a table which shows return in % or different look back periods. M=Month,

W=Weeks

look back return %

2W 5.2%

1M 23%

2M 29.2%

3M 41.2%

3M 1W (peak) 41.6%

4M 39.9%

5M 33.8%

6M 33.5%

8M 27.1%

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10M 22.2%

12M 15.6%

The good thing is that the strategy is quite stable. You see this because the above table is smooth and

there are no outlier.

The peak performance is at 13 Weeks. Wen the period is too long then we do not capture the 2008 crash.

When it is too short, every small correction will make you switch which results in a sell low, buy high

behaviour. Anyway you do not want to capture small corrections which are just normal, but you want to

capture long lasting economic cycle trends.

13 Aug 2013, 04:56 AM

Ian Farbrother Very useful table. Thanks!

18 Aug 2013, 04:52 PM

philkaufman Agree, this is the type of article us novices want. I too would be interested in the answer to the 1 month

performance question from shefali1, not only to catch more current trends, but also since the seekin alpha

portfolio already calcuates that for us. I don't see how the past 3 month performance would trigger a move to EDV

or SHY unless you had a very long correction and by then you would probably be too late. Maybe I'm missing

something.

12 Aug 2013, 12:33 PM

Ian Farbrother @philkaufman. At least during late 2007-2008 the markets gave very strong signals of correction well

before the Lehman collapse. I like to use 1-year and 4-year moving averages (proxied by 50-week and

200-week on Google Finance), and the signals were incredibly clear.

Unfortunately, at the time I wasn't paying attention to the markets <sigh>

12 Aug 2013, 06:19 PM

Hi, Frank;

For the purpose of evaluating and ranking volatility, which does this strategy rank higher -- high volatility or low

volatility? ETF Replay considers low volatility to be better, but from the above comments I suspect you may rank

high volatility higher.

Also, I am not clear on "20-day volatility averaged over 3 months." From where can this data be obtained?

12 Aug 2013, 07:31 PM

Frank Grossmann, Contributor

Author’s reply »

ranking only because of a short term spike, so, high volatility is lowering the rank. In fact, the ETF's in a rotation

It is better not have too much short term (e.g. 20day) volatility. An ETF should not get a higher

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strategy should have approximately the same volatility. This is not always possible, so using volatility to lower the

ranking can help.

13 Aug 2013, 05:41 AM

Random Number Thanks for this article! I have pondered, and even tried, various sector rotation strategies, but have never found

one that works consistently for me. The design of your strategy seems likely to prevent some typical problems

with sector rotation.

I have also studied your website, and the other strategies you describe there, and being a congenital sceptic, I

have to ask why you hold silver in your own portfolio. I don't see precious metals listed as a component of any of

your apparently successful strategies.

This is not a "gotcha" question--I'd really like to know.

Thanks.

13 Aug 2013, 07:52 AM

Frank Grossmann, Contributor

Author’s reply »

think that I bought it for 19$/ounce which is far below production cost. Also I could buy futures not SLV

and I only had to pay 5% margin. Roll cost is just over 1% per year which is very low. I never saw such a

bargain for a long time! I just have to wait some month.

You are right. However silver is the only investment without some rotation strategy. But

13 Aug 2013, 04:50 PM

Hello Frank,

thank you very much for your article - a nice one I looked at several times. However, I do have two questions:

- How do you anticipate a market crash / downturn and step to the sidelines? You state that this essential to a

superior performance.

- Do you factor in any fees and taxes? From your comments I see that there is infrequent trading, but every

rotation can easily cost 100+bps (fees, spreads,

)

Looking forward to read more from you,

Christoph

p.s.: Are you still in Switzerland?

13 Aug 2013, 08:21 AM

Frank Grossmann, Contributor

Author’s reply »

prices and lowering stock prices. And suddenly the strategy will swittch to Treasuries.

If you have a good discount broker the trade fees are not really high if your investment volume is enough.

I do not anticipate a market crash. The marked does it by itself by rising the Treasury

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I think you should have at least 50'000 $ to invest.

I am living in Switzerland near Zurich and have 4 kids and a beautiful wife.

13 Aug 2013, 04:57 PM

High Frank,

I have seen your critical comments regarding commodities.

Does this also apply for gold?

Best regards

Hans

13 Aug 2013, 08:47 AM

Frank Grossmann, Contributor

Author’s reply »

something with a negative correlation to it. The only pair which works a little bit is GLD-UUP (Dollar

Index). However GLD is more like a currency and currencies do not work well for rotation strategies.

t is difficult to construct rotation strategies with gold because you have not really

13 Aug 2013, 05:06 PM

Frank,

Looking back at the 2008 crash how did you avoid the huge drop with ILF ? Using the preceding 3 month scenario

ILF would have been the ETF you would have been invested in when it lost close to 80%

Thanks

13 Aug 2013, 04:27 PM

Frank Grossmann, Contributor

Author’s reply »

but starting July 2008 EDV went of like a rocket and showed much better 3 month returns then all other

ETFs in the strategy. So, it was the Treasury ETF EDV which avoided the crash.

ILF was only good until end 2007, then MDY was performing quite good for some time,

13 Aug 2013, 05:12 PM

One can one up this approach - and granted I don't have the data to prove it - and sell the ETF and go cash when

ETF closes below 200 day moving average. I'm sure Frank could provide us the data.

And finally, I don't think the strategy that involves long term government bonds is a viable one in the environment

of rising interest rates. It was the best hiding spot during 2008 crash, but it is not now, and will not be when the

next crisis comes about. Therefore, my personal view is that 5 ETF approach paired with cash might be better.

13 Aug 2013, 04:41 PM

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Frank Grossmann, Contributor

Author’s reply »

There is also a cash stop in the strategy. I just do not consider it as an ETF

13 Aug 2013, 05:34 PM

varan A good way to spice this up is to use MVV or UMDD instead of MDY. Maximum drawdown (with MVV 22%, UMDD

44%, MDY 17%, using simulated MVV and UMDD for the period 2003-onwards) increases, of course, but the

returns are quite eye popping and probably justified for the mildly speculative non-risk-averse investor. With both

MVV and UMDD you get more than 40% CAGR for 2003-2013 on the basis of ranking that uses just the returns

and not volatility.

13 Aug 2013, 04:55 PM

As a perma-skeptic, I wonder if the main motivation of this article is to point people to your website, hoping to gain

customers at $30 or $45 per month?

13 Aug 2013, 05:14 PM

varan Why do you have to go to his website? You can implement it yourself. It is not that hard. If you can't you

can always go to my website :)

You can even get more than 71% return in back testing, that he advertises on his website, without any

help. (But be ware - any back test that starts from just 2011 comes with a lot of caution.)

13 Aug 2013, 05:25 PM

Frank Grossmann, Contributor

Author’s reply »

not like this method to much. A rotation method with a negative correlated ETF like the EDV Treasury is much

better, because EDV goes up very fast if a market becomes troubled and so sometimes the strategy switches to

Treasuries even before you have to realize a loss with a stock market ETF.

To close below 200 day moving average an ETF has already to go down a lot. This is why I do

13 Aug 2013, 05:17 PM

Ahhh the Dick Fabian model my dad used to follow.

I agree with the author, specially in this day & age. Greater volatiliy & the magnitude of the swings makes

the Fabian 200 MA model not as good as year's past. Just my opinion of course.

15 Aug 2013, 03:48 PM

Frank, thank you for a very good article. I have a doubt. From what I read, EPP excludes Japan. Does it mean

that the global markets strategy excludes one of the biggest economies in the world? If so, what is the reason?

15 Aug 2013, 03:35 PM

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Frank Grossmann, Contributor

Author’s reply »

always exclude it. Japan seems not to fit in a larger basket of countries with similar economic cycles.

But all together the 5 ETFs are quite a good composition. If weighted 20% each, they replicate nearly

You are right. Japan is missing. However I do not exactly know why iShares and Co.

100% the ACWI ETF (iShares MSCI All-World ACWI Index)

19 Aug 2013, 08:20 AM

powerofpi Frank, the outperformance that you cite is pretty remarkable! It really does sound too good to be true, because it

implies that you have a magic market-timing tool. The natural question is that if market timing were so easy,

wouldn't everybody do it?

Your strategy has two key components: (1) picking a handful of complementary ETFs, and (2) performing a

ranking each month to decide which one to hold. #1 is straightforward, even if it is tedious to optimize the perfect

mix. #2 seems to be where the magic (if any) exists, since this is what performs the function of market timing. In a

comment above, you said you use:

Ranking = 0.7*performance + 0.3*volatility

Like other commenters, I wonder how you came up with these particular weights? I also wonder how you decided

to use a 3-month lookback period. My biggest concern with this strategy is whether or not this is a general recipe

for good performance. Maybe the markets of the past 10 years happened to be the optimal inputs for making your

algorithm look good, but the next 10 years will be mediocre.

Summary: how did you arrive at the details, and what reason do you have to expect that this strategy will

generalize well into an uncertain future?

15 Aug 2013, 05:52 PM

Frank Grossmann, Contributor

Author’s reply »

Quantshare software. Such a mix is necessary if you combine ETFs with different volatility.

Another way to do it without these calculations is by comparing the sharpe ratios of the ETFs. This way

you compare directly volatility weighted return.

I found this 0.7/0.3 performance volatility mix by doing an optimisation with the

27 Sep 2013, 04:30 PM

powerofpi My concern put differently: given a historical market period, it's not difficult to find a strategy that in hindsight works

extraordinarily well for that period, but perhaps not as well for other periods. How much confidence do you have

that your strategy does not over-fit the peculiar circumstances of the past 10 years? (Over-fitting is a common

problem in machine learning and other backtested quantitative approaches)

15 Aug 2013, 06:19 PM

Frank Grossmann, Contributor

Author’s reply »

using Quantshare and you really get stable positive returns for many combinations.

I think this strategy is very robust. I have optimized the parameters for a wide range

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27

Sep 2013, 04:33 PM

Powerofpi:

I would recommend the book "The Ivy Portfolios" as a good read about market timing. Most of those

studies go back over 100 years. There is a section on momentum or relative strength that also shows

serious performance improvement. Most active fund managers are not allowed to use market timing

because it is their job to stay invested. High management fees and having to have some money in cash

can play havoc with performance.

For example, the manager of a large cap growth fund can not buy small cap or value stocks or treasury

bonds during down markets so the manager is really going to have a difficult time outperforming. Plus, he

can not go to 60% cash or anything like that. FINRA would reprimand him for violating the terms of the

fund. When an investor buys an active small cap mutual fund he is buying the stock picking talent of the

manager but no macro changes such as going largely to cash. The investor is going to get small cap

stocks, period.

Market timing does work!

15 Oct 2013, 09:08 AM

Frank,

Do you have any thoughts about using the top two performers on a monthly basis instead of one?

18 Aug 2013, 07:31 AM

Frank Grossmann, Contributor

Author’s reply »

well performing strategy. However here I could not make a larger market selection.

If I compose an equally weighted portfolio of these 5 ETFs then the back test chart since 2003 is nearly 100%

identical to the ACWI ETF (iShares MSCI All-World ACWI Index). Both would have about 3% annual performance

and a maximum draw down of about nearly 60%. This shows you that here you are trading an all-world selection

and not just a selection of well performing ETFs

You also see that the strategy did very well in selecting the good ETFs to achieve a annual return of 41% instead

of 3% for an equal mix of the 5 ETFs.

I think an All-World index will always have something like a 3% positive performance because of inflation.

So, I am very confident, that such a strategy also works in the future as long as we have this positive trend and as

long as we have markets going up and down in economic cycles.

It would be cheating if I would just select some historically well performing ETFs just to have a

19 Aug 2013, 08:33 AM

Thanks for the reply. I meant to use top two ETF out of the five funds that you choose from. Is this still the same

answer?

19 Aug 2013, 09:20 AM

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Frank Grossmann, Contributor

Author’s reply »

questions can move inbetween.

The reply was for the question of powerofpi. I don't understand why somtimes a new

There are some strategies where it makes sense to choose the top 2 or even 3 ETFs. If you have for

example a country rotation strategy with 10-20 countries, it makes sense because it reduces volatility.

However for this strategy with only 5 ETFs the average annual performance goes down from 41% to 31%.

19 Aug 2013, 11:54 AM

gtarolli Any thoughts on using some volatility index for the overall market to tweak the look back time period. For

example, if the market is quiet, use a smaller window to more quickly catch a movement. And when the market is

noisy, enlarge the window?

23 Aug 2013, 01:03 PM

Frank Grossmann, Contributor

Author’s reply »

a forward looking expected volatility. I agree that it could probably be used in a rotation strategy which

only switches between US values like MDY-TLT. I never tested it. The main problem is that I do not have

such implied volatility for other ETFs. However I can calculate historical volatility for all ETFs.

The difference is that a volatility index like VIX gives me implied option volatility which is

25 Aug 2013, 08:00 AM

Great article again

24 Aug 2013, 11:34 PM

powerofpi Here's one other experiment I ran, and this time there was a bit more history to work with. I think it validates your

GMR approach. I used Vanguard index funds covering the US, Europe, Pacific, Emerging, LT Corporate Bonds,

and LT Government Bonds:

Beginning financial backtests!

Investment pool: [VUSTX, VTSMX, VEIEX, VEURX, VPACX, VWESX]

Max common history: 1996-06-20

Start date: 1997-06-14

End date: 2013-08-23

GMR (60,0.8,0.2) annual 60.85%

GMR (60,0.7,0.3) annual 59.9%

GMR (70,0.5,0.5) annual 57.96%

GMR (220,0.7,0.3) annual 55.85%

GMR (60,0.9,0.1) annual 54.48%

GMR (220,0.8,0.2) annual 49.97%

9/7/2018

A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003 | Seeking Alpha

GMR (220,0.9,0.1) annual 49.97% GMR (60,0.6,0.4) annual 49.32% GMR (210,0.9,0.1) annual 47.46% GMR (190,0.7,0.3) annual 43.65% GMR (180,0.6,0.4) annual 41.68% GMR (180,0.7,0.3) annual 41.68% GMR (320,0.1,0.9) annual 41.11% GMR (190,0.8,0.2) annual 39.22% GMR (50,0.2,0.8) annual 37.95% GMR (40,0.6,0.4) annual 37.91% GMR (50,0.1,0.9) annual 37.67% GMR (150,0.7,0.3) annual 37.59% GMR (40,0.9,0.1) annual 37.57% GMR (30,0.2,0.8) annual 37.52% GMR (180,0.9,0.1) annual 35.81% GMR (40,0.8,0.2) annual 35.31% GMR (180,0.8,0.2) annual 35.28% GMR (210,0.8,0.2) annual 35.15% GMR (190,0.9,0.1) annual 35.13% GMR (30,0.3,0.7) annual 34.89% GMR (40,0.5,0.5) annual 33.07% GMR (130,0.4,0.6) annual 32.56% GMR (60,0.5,0.5) annual 32.41% GMR (50,0.3,0.7) annual 32.34% GMR (150,0.8,0.2) annual 30.67% GMR (150,0.9,0.1) annual 30.67% GMR (80,0.9,0.1) annual 30.03% GMR (70,0.6,0.4) annual 29.97% GMR (40,0.7,0.3) annual 29.25% GMR (340,0.1,0.9) annual 29.21% GMR (320,0.2,0.8) annual 29.11% GMR (30,0.8,0.2) annual 28.83% GMR (20,0.9,0.1) annual 28.57% GMR (30,0.9,0.1) annual 28.51% GMR (330,0.1,0.9) annual 28.18% GMR (210,0.6,0.4) annual 27.82% GMR (210,0.7,0.3) annual 27.82% GMR (340,0.2,0.8) annual 27.55% GMR (330,0.4,0.6) annual 27.46% GMR (310,0.6,0.4) annual 27.04% GMR (70,0.4,0.6) annual 26.88% GMR (290,0.5,0.5) annual 26.18% GMR (60,0.3,0.7) annual 26.09% GMR (360,0.1,0.9) annual 26.01% GMR (360,0.2,0.8) annual 26.01%

9/7/2018

A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003 | Seeking Alpha

GMR (330,0.2,0.8) annual 25.86% GMR (240,0.5,0.5) annual 25.69% GMR (60,0.2,0.8) annual 25.08% GMR (80,0.8,0.2) annual 25.05% GMR (30,0.1,0.9) annual 25.01% GMR (100,0.5,0.5) annual 24.79% GMR (20,0.8,0.2) annual 24.29% GMR (90,0.5,0.5) annual 24.09% GMR (270,0.2,0.8) annual 23.99% GMR (80,0.6,0.4) annual 23.78% GMR (70,0.8,0.2) annual 23.69% GMR (40,0.3,0.7) annual 23.06% GMR (70,0.7,0.3) annual 22.98% GMR (40,0.1,0.9) annual 22.76% GMR (240,0.8,0.2) annual 22.64% GMR (240,0.9,0.1) annual 22.64% GMR (220,0.3,0.7) annual 22.62% GMR (40,0.2,0.8) annual 22.36% GMR (300,0.1,0.9) annual 22.28% GMR (300,0.2,0.8) annual 22.28% GMR (230,0.6,0.4) annual 22.25% GMR (230,0.7,0.3) annual 22.25% GMR (30,0.4,0.6) annual 22.24% GMR (150,0.4,0.6) annual 22.09% GMR (50,0.4,0.6) annual 22.08% GMR (150,0.3,0.7) annual 22.01% GMR (10,0.1,0.9) annual 21.86% GMR (30,0.7,0.3) annual 21.78% GMR (260,0.2,0.8) annual 21.71% GMR (100,0.9,0.1) annual 21.61% GMR (300,0.3,0.7) annual 21.22% GMR (50,0.5,0.5) annual 21.02% GMR (100,0.7,0.3) annual 20.99% GMR (100,0.8,0.2) annual 20.99% GMR (50,0.8,0.2) annual 20.94% GMR (330,0.3,0.7) annual 20.87% GMR (50,0.7,0.3) annual 20.83% GMR (270,0.5,0.5) annual 20.78% GMR (70,0.3,0.7) annual 20.67% GMR (320,0.3,0.7) annual 20.66% GMR (80,0.5,0.5) annual 20.37% GMR (230,0.8,0.2) annual 20.35% GMR (230,0.9,0.1) annual 20.35% GMR (30,0.6,0.4) annual 20.24% GMR (110,0.2,0.8) annual 20.06%

9/7/2018

A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003 | Seeking Alpha

GMR (20,0.7,0.3) annual 19.8% GMR (250,0.5,0.5) annual 19.62% GMR (250,0.6,0.4) annual 19.44% GMR (200,0.7,0.3) annual 19.36% GMR (40,0.4,0.6) annual 19.31% GMR (310,0.7,0.3) annual 19.24% GMR (310,0.8,0.2) annual 19.24% GMR (50,0.6,0.4) annual 19.05% GMR (60,0.1,0.9) annual 19.02% GMR (190,0.3,0.7) annual 19.01% GMR (190,0.4,0.6) annual 19.01% GMR (310,0.5,0.5) annual 18.98% GMR (60,0.4,0.6) annual 18.83% GMR (110,0.1,0.9) annual 18.19% GMR (70,0.9,0.1) annual 18.08% GMR (80,0.7,0.3) annual 18.09% GMR (10,0.3,0.7) annual 17.94% GMR (250,0.3,0.7) annual 17.95% GMR (250,0.4,0.6) annual 17.95% GMR (270,0.3,0.7) annual 17.84% GMR (220,0.2,0.8) annual 17.78% GMR (340,0.3,0.7) annual 17.78% GMR (220,0.6,0.4) annual 17.75% GMR (220,0.4,0.6) annual 17.66% GMR (270,0.4,0.6) annual 17.62% GMR (320,0.4,0.6) annual 17.59% GMR (30,0.5,0.5) annual 17.58% GMR (10,0.2,0.8) annual 17.55% GMR (50,0.9,0.1) annual 17.52% GMR (270,0.6,0.4) annual 17.29% GMR (200,0.8,0.2) annual 17.21% GMR (140,0.8,0.2) annual 16.79% GMR (140,0.9,0.1) annual 16.79% GMR (240,0.6,0.4) annual 16.68% GMR (70,0.2,0.8) annual 16.62% GMR (220,0.1,0.9) annual 16.61% GMR (230,0.5,0.5) annual 16.54% GMR (300,0.4,0.6) annual 16.27% GMR (20,0.6,0.4) annual 16.23% GMR (240,0.7,0.3) annual 16.16% GMR (110,0.3,0.7) annual 16.14% GMR (130,0.7,0.3) annual 16.08% GMR (130,0.8,0.2) annual 16.08% GMR (250,0.7,0.3) annual 16.03% GMR (250,0.8,0.2) annual 16.03%

9/7/2018

A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003 | Seeking Alpha

GMR (250,0.9,0.1) annual 16.03% GMR (350,0.2,0.8) annual 15.4% GMR (280,0.2,0.8) annual 15.13% GMR (280,0.3,0.7) annual 15.13% GMR (270,0.7,0.3) annual 15.07% GMR (270,0.8,0.2) annual 15.07% GMR (270,0.9,0.1) annual 15.07% GMR (20,0.2,0.8) annual 15.04% GMR (200,0.3,0.7) annual 15.04% GMR (350,0.1,0.9) annual 15.01% GMR (360,0.3,0.7) annual 14.85% GMR (100,0.6,0.4) annual 14.8% GMR (230,0.3,0.7) annual 14.74% GMR (170,0.9,0.1) annual 14.68% GMR (160,0.4,0.6) annual 14.52% GMR (260,0.3,0.7) annual 14.47% GMR (260,0.4,0.6) annual 14.47% GMR (290,0.6,0.4) annual 14.47% GMR (290,0.7,0.3) annual 14.47% GMR (290,0.8,0.2) annual 14.47% GMR (110,0.6,0.4) annual 14.41% GMR (200,0.9,0.1) annual 14.36% GMR (360,0.4,0.6) annual 14.32% GMR (290,0.2,0.8) annual 14.3% GMR (290,0.3,0.7) annual 14.3% GMR (170,0.8,0.2) annual 14.24% GMR (340,0.4,0.6) annual 14.09% GMR (210,0.3,0.7) annual 14.04% GMR (170,0.4,0.6) annual 13.75% GMR (110,0.5,0.5) annual 13.71% GMR (130,0.1,0.9) annual 13.63% GMR (340,0.5,0.5) annual 13.55% GMR (160,0.2,0.8) annual 13.47% GMR (150,0.6,0.4) annual 13.4% GMR (160,0.3,0.7) annual 13.38% GMR (210,0.4,0.6) annual 13.39% GMR (20,0.3,0.7) annual 13.34% GMR (20,0.1,0.9) annual 13.03% GMR (140,0.4,0.6) annual 12.96% GMR (180,0.5,0.5) annual 12.91% GMR (280,0.4,0.6) annual 12.85% GMR (190,0.2,0.8) annual 12.68% GMR (180,0.3,0.7) annual 12.63% GMR (340,0.7,0.3) annual 12.57% GMR (340,0.8,0.2) annual 12.57%

9/7/2018

A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003 | Seeking Alpha

GMR (340,0.9,0.1) annual 12.57% GMR (110,0.4,0.6) annual 12.52% GMR (80,0.4,0.6) annual 12.48% GMR (310,0.4,0.6) annual 12.44% GMR (20,0.4,0.6) annual 12.43% GMR (240,0.3,0.7) annual 12.29% GMR (120,0.8,0.2) annual 12.23% GMR (100,0.4,0.6) annual 12.14% GMR (310,0.1,0.9) annual 12.11% GMR (310,0.2,0.8) annual 12.11% GMR (310,0.3,0.7) annual 12.11% GMR (190,0.1,0.9) annual 12.02% GMR (150,0.1,0.9) annual 11.89% GMR (190,0.6,0.4) annual 11.85% GMR (310,0.9,0.1) annual 11.72% GMR (130,0.2,0.8) annual 11.62% GMR (180,0.4,0.6) annual 11.59% GMR (150,0.2,0.8) annual 11.56% GMR (270,0.1,0.9) annual 11.57% GMR (130,0.3,0.7) annual 11.52% GMR (250,0.1,0.9) annual 11.37% GMR (290,0.1,0.9) annual 11.31% GMR (260,0.1,0.9) annual 11.28% GMR (170,0.7,0.3) annual 11.27% GMR (90,0.6,0.4) annual 11.19% GMR (130,0.9,0.1) annual 11.16% GMR (110,0.9,0.1) annual 11.13% GMR (130,0.6,0.4) annual 11.12% GMR (350,0.3,0.7) annual 11.12% GMR (350,0.4,0.6) annual 11.12% GMR (90,0.7,0.3) annual 11.09% GMR (130,0.5,0.5) annual 11.09% GMR (160,0.5,0.5) annual 11.04% GMR (230,0.4,0.6) annual 10.83% GMR (290,0.9,0.1) annual 10.72% GMR (140,0.3,0.7) annual 10.62% GMR (180,0.2,0.8) annual 10.63% GMR (70,0.1,0.9) annual 10.58% GMR (230,0.2,0.8) annual 10.43% GMR (250,0.2,0.8) annual 10.41% GMR (150,0.5,0.5) annual 10.32% GMR (280,0.5,0.5) annual 10.27% GMR (290,0.4,0.6) annual 10.2% GMR (200,0.4,0.6) annual 10.16% GMR (330,0.6,0.4) annual 10.01%

9/7/2018

A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003 | Seeking Alpha

GMR (120,0.9,0.1) annual 9.98% GMR (360,0.9,0.1) annual 9.99% GMR (180,0.1,0.9) annual 9.78% GMR (230,0.1,0.9) annual 9.65% GMR (340,0.6,0.4) annual 9.47% GMR (200,0.1,0.9) annual 9.2% GMR (160,0.1,0.9) annual 9.02% GMR (220,0.5,0.5) annual 8.97% GMR (100,0.1,0.9) annual 8.79% GMR (100,0.2,0.8) annual 8.79% GMR (240,0.2,0.8) annual 8.63% GMR (100,0.3,0.7) annual 8.49% GMR (240,0.1,0.9) annual 8.36% GMR (360,0.5,0.5) annual 8.29% GMR (200,0.5,0.5) annual 8.02% GMR (90,0.9,0.1) annual 7.9% GMR (330,0.5,0.5) annual 7.91% GMR (190,0.5,0.5) annual 7.81% GMR (80,0.1,0.9) annual 7.5% GMR (120,0.6,0.4) annual 7.46% GMR (140,0.7,0.3) annual 7.31% GMR (170,0.6,0.4) annual 7.22% GMR (200,0.6,0.4) annual 7.11% GMR (210,0.1,0.9) annual 7.04% GMR (280,0.1,0.9) annual 7.03% GMR (90,0.8,0.2) annual 6.9% GMR (160,0.9,0.1) annual 6.87% GMR (80,0.2,0.8) annual 6.76% GMR (210,0.2,0.8) annual 6.66% GMR (80,0.3,0.7) annual 6.51% GMR (140,0.1,0.9) annual 6.47% GMR (140,0.5,0.5) annual 6.44% GMR (140,0.6,0.4) annual 6.44% GMR (210,0.5,0.5) annual 6.39% GMR (160,0.6,0.4) annual 6.35% GMR (170,0.1,0.9) annual 6.19% GMR (90,0.4,0.6) annual 6.17% GMR (10,0.4,0.6) annual 6.1% GMR (240,0.4,0.6) annual 5.94% GMR (260,0.6,0.4) annual 5.82% GMR (260,0.7,0.3) annual 5.82% GMR (170,0.2,0.8) annual 5.74% GMR (90,0.1,0.9) annual 5.56% GMR (200,0.2,0.8) annual 5.41% GMR (160,0.8,0.2) annual 5.33%

9/7/2018

A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003 | Seeking Alpha

GMR (300,0.5,0.5) annual 5.28% GMR (300,0.6,0.4) annual 5.28% GMR (300,0.7,0.3) annual 5.28% GMR (20,0.5,0.5) annual 5.25% GMR (120,0.7,0.3) annual 5.25% GMR (170,0.3,0.7) annual 5.23% GMR (90,0.2,0.8) annual 5.16% GMR (110,0.7,0.3) annual 5.13% GMR (110,0.8,0.2) annual 5.13% GMR (260,0.8,0.2) annual 5.13% GMR (260,0.9,0.1) annual 5.13% GMR (280,0.6,0.4) annual 5.13% GMR (170,0.5,0.5) annual 5.01% GMR (90,0.3,0.7) annual 4.98% GMR (140,0.2,0.8) annual 4.86% GMR (120,0.1,0.9) annual 4.69% GMR (120,0.5,0.5) annual 4.47% GMR (360,0.6,0.4) annual 4.46% GMR (360,0.7,0.3) annual 4.46% GMR (360,0.8,0.2) annual 4.46% GMR (330,0.7,0.3) annual 4.14% GMR (330,0.8,0.2) annual 4.14% GMR (330,0.9,0.1) annual 4.14% GMR (320,0.5,0.5) annual 4.07% GMR (300,0.8,0.2) annual 4.01% GMR (10,0.6,0.4) annual 3.47% GMR (320,0.6,0.4) annual 3.1% GMR (320,0.7,0.3) annual 3.1% GMR (320,0.8,0.2) annual 3.1% GMR (320,0.9,0.1) annual 3.1% GMR (10,0.7,0.3) annual 3.04% GMR (120,0.2,0.8) annual 3% GMR (120,0.3,0.7) annual 3% GMR (260,0.5,0.5) annual 3% GMR (350,0.9,0.1) annual 2.88% GMR (160,0.7,0.3) annual 2.6% GMR (10,0.8,0.2) annual 2.56% GMR (120,0.4,0.6) annual 2.33% GMR (280,0.9,0.1) annual 2.34% GMR (280,0.7,0.3) annual 2.17% GMR (300,0.9,0.1) annual 2.01% GMR (350,0.5,0.5) annual 2.01% GMR (350,0.6,0.4) annual 2.01% GMR (350,0.7,0.3) annual 2.01% GMR (350,0.8,0.2) annual 2.01%

9/7/2018

A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003 | Seeking Alpha

GMR (10,0.5,0.5) annual 1.78%

GMR (10,0.9,0.1) annual 1.49%

GMR (280,0.8,0.2) annual 1.06%

25 Aug 2013, 07:29 AM

GabrielSyme This was very informative. Thanks much for posting. How do you measure volatility in your backtests?

I've tried to replicate your findings, but thus far I'm seeing returns that are significantly lower than those

you generated above. (I'm using a system that ranks normalized performance and volatility separately

over the lookback period and then weights them. I also find that weights of 0.7/0.3 and 0.8/0.2 seem best.

But the volatility piece seems to detract from returns. Doubtless I'm doing something dumb.)

Thanks again!

30 Sep 2013, 03:14 PM

powerofpi Frank, I wrote some financial backtesting software to repeat your experiment.

SETUP

-------------------

Dates: 1/22/2009 to 8/23/2013

Investments: [MDY, IEV, EEM, ILF, EPP, EDV, SHY]

Lookback: 10 to 360 days by 10

Performance Weight: 0.1 to 0.9 by 0.1

Volatility Weight: 0.1 to 0.9 by 0.1

Notice that my date range is much more restricted than yours- this is because the earliest date for which your

mentioned investments were trading at the same time is 1/29/2008. I let my experiment begin 359 days after this

(so that all setups had at least a full lookback period at the outset).

RESULTS

-------------------

<Strategy> (<Lookback>,<

GMR (150,0.1,0.9) annual 52.63%

GMR (320,0.1,0.9) annual 48.24%

GMR (40,0.4,0.6) annual 48.18%

GMR (330,0.1,0.9) annual 47.46%

GMR (330,0.2,0.8) annual 47.46%

GMR (320,0.2,0.8) annual 46.44%

GMR (320,0.3,0.7) annual 46.44%

GMR (350,0.1,0.9) annual 44.48%

GMR (350,0.2,0.8) annual 44.48%

GMR (350,0.3,0.7) annual 44.48%

GMR (230,0.1,0.9) annual 44.22%

GMR (230,0.2,0.8) annual 44.22%

GMR (340,0.1,0.9) annual 44.22%

Weight>,<Volatility Weight>)

9/7/2018

A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003 | Seeking Alpha

GMR (340,0.2,0.8) annual 44.22% GMR (340,0.3,0.7) annual 44.22% GMR (150,0.2,0.8) annual 43.59% GMR (40,0.5,0.5) annual 41.63% GMR (220,0.3,0.7) annual 40.49% GMR (230,0.3,0.7) annual 39.72% GMR (250,0.1,0.9) annual 37.44% GMR (70,0.6,0.4) annual 36.86% GMR (70,0.7,0.3) annual 36.86% GMR (80,0.9,0.1) annual 36.17% GMR (80,0.1,0.9) annual 35.65% GMR (220,0.1,0.9) annual 35.58% GMR (220,0.2,0.8) annual 35.58% GMR (40,0.3,0.7) annual 35.32% GMR (90,0.9,0.1) annual 34.84% GMR (60,0.7,0.3) annual 34.82% GMR (60,0.8,0.2) annual 34.82% GMR (360,0.3,0.7) annual 34.45% GMR (60,0.9,0.1) annual 34% GMR (240,0.1,0.9) annual 33.58% GMR (240,0.2,0.8) annual 33.58% GMR (240,0.3,0.7) annual 33.58% GMR (130,0.1,0.9) annual 33.41% GMR (40,0.2,0.8) annual 33.3% GMR (90,0.8,0.2) annual 32.43% GMR (80,0.7,0.3) annual 31.78% GMR (80,0.8,0.2) annual 31.78% GMR (70,0.5,0.5) annual 31.69% GMR (60,0.6,0.4) annual 31.62% GMR (70,0.8,0.2) annual 31.5% GMR (70,0.9,0.1) annual 31.5% GMR (260,0.1,0.9) annual 30.97% GMR (260,0.2,0.8) annual 30.97% GMR (260,0.3,0.7) annual 30.97% GMR (180,0.1,0.9) annual 30.63% GMR (180,0.2,0.8) annual 30.63% GMR (180,0.3,0.7) annual 30.63% GMR (30,0.2,0.8) annual 30.52% GMR (210,0.1,0.9) annual 30.22% GMR (60,0.5,0.5) annual 29.85% GMR (360,0.1,0.9) annual 29.78% GMR (60,0.4,0.6) annual 29.1% GMR (30,0.5,0.5) annual 29.05% GMR (70,0.3,0.7) annual 29.04% GMR (70,0.4,0.6) annual 29.04%

9/7/2018

A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003 | Seeking Alpha

GMR (40,0.6,0.4) annual 28.43% GMR (80,0.5,0.5) annual 28.05% GMR (80,0.6,0.4) annual 28.05% GMR (90,0.7,0.3) annual 27.32% GMR (360,0.2,0.8) annual 27.24% GMR (30,0.1,0.9) annual 26.48% GMR (310,0.1,0.9) annual 25.46% GMR (310,0.2,0.8) annual 25.46% GMR (310,0.3,0.7) annual 25.46% GMR (30,0.3,0.7) annual 23.48% GMR (40,0.1,0.9) annual 23.4% GMR (120,0.6,0.4) annual 23.23% GMR (120,0.7,0.3) annual 23.23% GMR (120,0.8,0.2) annual 23.23% GMR (120,0.9,0.1) annual 23.23% GMR (100,0.7,0.3) annual 22.88% GMR (100,0.8,0.2) annual 22.88% GMR (100,0.9,0.1) annual 22.88% GMR (170,0.1,0.9) annual 22.34% GMR (290,0.1,0.9) annual 21.69% GMR (210,0.2,0.8) annual 21.48% GMR (210,0.3,0.7) annual 21.48% GMR (30,0.4,0.6) annual 21.42% GMR (80,0.2,0.8) annual 20.55% GMR (200,0.1,0.9) annual 20.13% GMR (120,0.3,0.7) annual 20% GMR (120,0.4,0.6) annual 20% GMR (120,0.5,0.5) annual 20% GMR (330,0.3,0.7) annual 18.91% GMR (30,0.6,0.4) annual 18.88% GMR (250,0.2,0.8) annual 18.48% GMR (250,0.3,0.7) annual 18.48% GMR (200,0.2,0.8) annual 18.3% GMR (200,0.3,0.7) annual 18.3% GMR (10,0.4,0.6) annual 18.04% GMR (190,0.1,0.9) annual 17.54% GMR (190,0.2,0.8) annual 17.54% GMR (190,0.3,0.7) annual 17.54% GMR (50,0.1,0.9) annual 17.41% GMR (300,0.1,0.9) annual 17.23% GMR (300,0.2,0.8) annual 17.23% GMR (300,0.3,0.7) annual 17.23% GMR (290,0.2,0.8) annual 16.69% GMR (290,0.3,0.7) annual 16.69% GMR (90,0.3,0.7) annual 16.21%

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A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003 | Seeking Alpha

GMR (50,0.2,0.8) annual 16.15%

GMR (80,0.3,0.7) annual 16.1%

GMR (90,0.1,0.9) annual 15.62%

GMR (90,0.4,0.6) annual 15.58%

GMR (90,0.2,0.8) annual 15.51%

GMR (90,0.5,0.5) annual 15.49%

GMR (90,0.6,0.4) annual 15.49%

GMR (100,0.6,0.4) annual 15.36%

GMR (80,0.4,0.6) annual 15%

GMR (270,0.3,0.7) annual 14.76%

GMR (170,0.2,0.8) annual 14.65%

GMR (170,0.3,0.7) annual 14.65%

GMR (30,0.7,0.3) annual 13.93%

GMR (20,0.3,0.7) annual 13.55%

GMR (50,0.6,0.4) annual 13.23%

GMR (120,0.1,0.9) annual 12.95%

GMR (160,0.2,0.8) annual 12.93%

GMR (160,0.3,0.7) annual 12.93%

DISCUSSION

-------------------

Clearly, my experiment had less historical data to work with, because I constrained myself to a period where all

GMR setups had at least one lookback period of data with which to make decisions. Obviously whatever

experiment you ran must have not considered this.

As a result, I don't think I have enough data to verify your findings. If you look at my results, the top-performing

lookback periods differ by a lot! In fact, they jump around so much that there simply must not be enough data to

differentiate them. That, or the GMR method doesn't really work, but some of the setups simply "got lucky".

I look forward to trying out some setups that have more history. Thanks for getting me thinking!

25 Aug 2013, 07:30 AM

Frank Grossmann, Contributor

Author’s reply »

thing I don't understand is, why you still have a good return with a volatility weight of 0.9 if you include SHY. My

back test would always invest in SHY because the volatility of SHY is nearly 0.

I hope we keep in touch in the future. You can email me to mail@logical-invest.com

I am very impressed! Nice back tests. We could work together. How did you program it? One

25 Aug 2013, 11:56 AM

powerofpi > One thing I don't understand is, why you still have a good return with a volatility weight of 0.9 if you

include SHY.

I think this oddity was due to the *very* limited price history. If you look at the experiment where I used

Vanguard index funds (so that the experiment had much more data), you'll see that the best weights were

9/7/2018

A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003 | Seeking Alpha

more like 0.8/0.2 or 0.7/0.3, which aligns with your findings.

The software I used is just a Java program which downloads and uses Yahoo Finance data to run tests.

25 Aug 2013, 12:49 PM

TrendXplorer, Contributor After reading a posting on Tactical Asset Allocation (http://bit.ly/15gTWlU) one of my visitors pointed me at your

article. Your's is a different take and indeed very interesting.

With some effort the thinkscript on my blog can be ported into the DIY strategy you mentioned by "just looking at

the 3-month historical performance and then always invest the next month in the best of the 6 ETFs." including the

ranking you mentioned in the comment section.

Then one would have another "30 seconds a month" system :)

Thank you for sharing, Frank.

27 Aug 2013, 03:34 PM

It appears that August will be the worst month of the past year. Is it safe to assume that there will be new winner

to invest in for September? Will you be updating the performance of this system as time goes on?

27 Aug 2013, 07:51 PM

Frank Grossmann, Contributor

Author’s reply »

Yes, I plan to have updates from time to time.

29 Aug 2013, 07:00 AM

Thank You!

29 Aug 2013, 09:24 PM

rabsparks I just noticed a change from IEV to FEZ, and I wonder prompted you to make the change.

31 Aug 2013, 01:39 PM

Frank Grossmann, Contributor

Author’s reply »

that since quite some time, our bigger asset management customers and also logical-invest is already

buying Euro Stoxx 50 Futures (FESXZ3) instead of the IEV ETF. The performance of the strategy is the

same, but trading Futures is much cheaper. Another reason is that the FEZ ETF trades at more than

double the volume then IEV.

We decided to replace IEV (S&P Europe 350) by FEZ (Euro Stoxx 50). Main reason is

02 Sep 2013, 05:54 AM

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A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003 | Seeking Alpha

What would be the effect of switching from once a month to once a week? Would that let the noise affect your

performance too much? Would it let you catch market moves faster?

31 Aug 2013, 03:49 PM

Frank Grossmann, Contributor

Author’s reply »

the overlying economical cycle. It would result in a sell low buy high strategy. The performance of the

strategy would go back to from CAGR 41% to 27% for the 10 year back test.

You are right. You would catch many noise down peaks which have nothing to do with

02 Sep 2013, 06:01 AM

I am paper trading this system based on your monitoring the 5 etfs and choosing the best performer for the past

90 days. As of 08/30/13 MDY went negative. So for Sept. the switch should be to cash as cash has 0 return which

is higher that negative? Is this correct? I like the system. very simple. I want to see how it performs during the

choppy times I see ahead till the end of the year.

01 Sep 2013, 03:27 AM

Frank Grossmann, Contributor

Author’s reply »

August). So, we keep going with MDY. But anyway it would be bad to switch now to cash. The worst thing

to do is to sell into a political crisis like the Syria crisis. Remember that we follow economic cycles and do

not try to do a short term market timing. Such a political crisis is normally short lived in contrary to an

economic crisis which can have very long term effects on the markets. By end of September the world will

look different again.

I still get +0.5% 3 month average for MDY (close last day of July until close last day of

02 Sep 2013, 06:08 AM

Why are you using the last day of July to the last day of August? I thought we were to use results of the

past 90 days not 30 days to decide what to invest in next.

02 Sep 2013, 05:32 PM

Frank,

I'm sorry, you don't get to pick cash or MDY - you go with the highest positive return in last 90 days or 3

months - both work similarly almost 100% of the time. If you start selectively cherry-picking investment

options, you no longer have the momentum driven investment strategy one designs.

08 Sep 2013, 04:38 PM

Frank Grossmann, Contributor

Author’s reply »

I look back bout 90 days, but I do this every month at the last trading day of the month.

18 Oct 2013, 09:03 AM

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A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003 | Seeking Alpha

I am not speaking for Frank, but if you employ the 5 Global Markets + Treasury then the winner goes to MDY. EDV

performed worse than MDY in the last 3 months. But if you employ the 5 Global Markets + Cash exit then it is

actually a tie between cash and MDY. I would probably choose cash since it outperformed MDY in the last month.

01 Sep 2013, 01:44 PM

Frank Grossmann, Contributor

Author’s reply »

August). So, we keep going with MDY. But anyway it would be bad to switch now to cash. The worst thing

to do is to sell into a political crisis like the Syria crisis. Remember that we follow economic cycles and do

not try to do a short term market timing. Such a political crisis is normally short lived in contrary to an

economic crisis which can have very long term effects on the markets. By end of September the world will

look different again.

Here in Europe the Stoxx 50 is just now up 1.7% this monday, first day of september. So I think anyway by

tomorrow cash is out again.

I still get +0.5% 3 month average for MDY (close last day of July until close last day of

02 Sep 2013, 06:11 AM

varan My computations suggest that IEV is the ETF for September.

Here are the profits based on adjusted close price data from Yahoo finance for the period from 5/31/2013 to

8/30/2013:

MDY 0.19

IEV 1.28

EEM -6.52

ILF -12.03

EPP -2.34

ZIV 0.99

EDV -9.06

01 Sep 2013, 03:58 PM

varan Sorry my system does not use volatility. So the above results do not correspond to the author's strategy.

01 Sep 2013, 04:20 PM

Frank Grossmann, Contributor

Author’s reply »

very close together.

The most important result of the strategy was to prevent you from investing in markets like Latin-America or

Emerging-Markets.

I do not think it makes a big difference if you invest now in US or European market. They are

02 Sep 2013, 06:15 AM

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A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003 | Seeking Alpha

Yes but since the end of June emerging markets EEM has started to outperform the US ETF markets by a little bit.

In the last two weeks they have substantially outperformed. Is that what you are seeing?

07 Sep 2013, 11:38 AM

Frank Grossmann, Contributor

Author’s reply »

market (MDY). They also have about 40% recovery potential on MDY seen 3 years back. However I wait

until they are no 1 in the strategy ranking. I do not make predictions.

You are right. Mainly EPP-Pacific and IEV-Europe (or FEZ) begin to outperforme the US

10 Sep 2013, 08:31 AM

Tiziano C. Dear Frank, thank you very much for sharing your findings.

I have been backtesting the ETF Macro Rotation strategy (5 Macro EtFs, EDV and SPY) on my own using Excel

and VBA. I backtested the strategy using weekly data (I used the closing prices of Friday) with return and

standard deviation as indicator and lookback period and trading period as parameters.

I used as indicator:

Past performance (of last x weeks) – weight*volatility (of last x weeks)

By not taking into account volatility (only past return) the results easily overperformed a buy and hold strategy but

they are very far from your results. My backtest performed best for a trading period of around 5 weeks and a

lookback period in the area 13-17 weeks, which is line with your findings. However what I don’t understand is that

the performance (by the way the period is 2003-2013), for the best lookback-trading period areas, is “only” around

18% annual return and 21% of volatility. I still regard it as a good performance given the financial crisis but I was

just wondering why there is such a difference between my finding and yours.

Here are the best results for 2003 – 2013 (with weight of volatility = 0):

Performance (Lookback period, trading period) = (Return/volatility/sha

P(13,4) = (19,37/21/0.78/-30)

P(13,5) = (15,94/21.45/0.60/-34)

P(13,6) = (17,56/21.5/0.68/-29)

P(14,4) = (20,5/20/0.87/-23)

P(14,5) = (18,9/19/0.81/-22.5)

P(14,6) = (18,14/21/0.72/-27.4)

P(15,4) = (18,8/20.57/0.77/-37)

P(15,5) = (18,8/21/0.75/-23.3)

P(15,6) = (18,1/21.2/0.71/-27)

P(16,4) = (15,5/21.45/0.58/-46)

P(16,5) = (13,08/21.45/0.47/-37.8)

P(16,6) = (16,5/21.6/0.62/-30)

08 Sep 2013, 09:27 AM

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02 Oct 2013, 06:37 AM

varan The most amazing thing about this strategy is that the maximum drawdown is only 20.1%. This is less than most

of the so-called "balanced funds" (only VWINX has the lower drawdown of 18%).

Even the almost equivalent mutual fund version of this strategy using the basket containing FDVLX FIEUX

FEMKX FLATX FPBFX and VUSTX (no mutual fund equivalent to ZIV exists as far as I know) yields a CAGR of

19.7% over the longer period 1991-2013 with a maximum drawdown of 24.5%. Of course the mutual fund strategy

cannot be implemented in practice as most of the funds have a hefty fee for getting out in less than two or three

months. (For comparison with the performance of the ETF basket, the mutual fund strategy returns over 25%

during 2003-2013.)

08 Sep 2013, 05:04 PM

Tiziano C. In addition to my previous comment where I posted my backtest’s results for weekly data I post also the results for

monthly data. Again, for the period Sept. 2013 – July 2013,by simply looking at the 3-month historical

performance and then monthly always investing in the best of the 7 ETFs I get the following result:

Annual return: 21.4%

Standard deviation: 13.8% (is around 21% using weekly data)

Sharpe:1.3

Drawdown:21.8%

With only the 5 Macro ETFs ad the Cash ETF the results are almost the same.

Again I wonder why there is such a huge difference in results, namely 21.4% vs 34%. Thank you

09 Sep 2013, 09:28 AM

Frank Grossmann, Contributor

Author’s reply »

add these weighted ranks. This gives me the final rank. Also It is important not to include cash as a stop if

treasuries have a negative correlation. I only do this if treasuries have a higher than -0.1 correlation.

If I test a basic MDY-EDV switch I already get about 23% average annual performance since 2003 and this only

looking at 3 month historical performance.

I think your ranking system is wrong. I do rankings for performance and for volatility and then

10 Sep 2013, 09:59 AM

For those of us who are just looking into this system here is a great website where you can plug in the

performance rating and volatility and see what ETF's comes out on top. The 100 largest rankings are ranked for

free - if you want more in depth and smaller etf's you have to pay a fee

There are a number of articles on the web publishing studies on back-testing and weightings for ETF momentum

strategies. A long in-depth study found that 4 months and 20-days (one month) was the best predictor of future

results. I am still unsure of the best volatility rating however. The Ivy League model seems to use 30% weighting

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Sep 2013, 10:18 AM

A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003 | Seeking Alpha

Sandra,

Thanks for the link. Very helpful.

26 Sep 2013, 01:51 PM

Frank,

Nice first article

lot

to absorb, have bookmarked it for further study.

I've spent a good deal of time in Switzerland (tourist, not expat), using Zurich ($) as a base from which to explore

the rest of the country. Need to spend more time in the south, however, Lugano, etc

Thanks.

26 Sep 2013, 01:53 PM

varan Good job. IEV has returned 6.2% to-date this month.

26 Sep 2013, 02:52 PM

You can also rank ETFs according to return and relative strenght in

27 Sep 2013, 10:29 AM

Is anyone using FEZ instead of IEV?

27 Sep 2013, 12:15 PM

rabsparks I switched to FEZ when I found out. FEZ has tracked along the same lines as IEV.

28 Sep 2013, 09:17 AM

Frank Grossmann, Contributor

Author’s reply »

license including all historical data. You can do simple things like a ranking screener, but you can also program

very complex trade systems.

I use Quantshare to do the ranking and all the optimization. It only costs about 230$ for a lifetime

27 Sep 2013, 04:40 PM

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A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003 | Seeking Alpha

Which etf does this strategy put us in right now?

28 Sep 2013, 09:25 AM

berry That's the $30 question. :)

28 Sep 2013, 09:41 AM

varan Based on the returns alone, ZIV.

28 Sep 2013, 09:42 AM

I thought ZIV was on his other strategy, with this one here i'm thinking it's FEZ unless my numbers are all

goofed up.

28 Sep 2013, 12:43 PM

varan You are right. IEV/FEZ is the second one, and so if you do not use ZIV, that will be the way to go.

Without ZIV (and based on rankings taking into account the returns alone) you get 32% CAGR during

2003-2013. That is by itself quite good, but with ZIV you get 44%.

28 Sep 2013, 12:54 PM

rabsparks I'm running GMR with the seven ETFs having replaced IEV with FEZ. I show FEZ as the number one ETF

for September, and have invested accordingly. Currently the FEZ return is 10.0%.

I am using .7 * (3month return)+ .3 * (volatility) as the equation.

You're right about the difference in the two strategies. ZIV is one of the ETFs on Mr. Grossmann's other

strategy, not GMR.

28 Sep 2013, 04:31 PM

Isn't the risk much higher using ZIV? Is there a chance that volatility could suddenly spike causing a big

loss?

29 Sep 2013, 12:56 PM

rabsparks Mr. Grossmann's other strategy is called Global Market Rotation Enhanced Strategy.

29 Sep 2013, 05:50 PM

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A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003 | Seeking Alpha

How are you measuring volatility? Standard deviation of daily returns during the 3-month lookback? Or

something else? Thanks!

30 Sep 2013, 09:12 PM

Elran Hi Frank ,

Nice article!

I am using sector rotation strategies as my main investing approach,

and i have also tested many rotation systems over the years.

I tried to simulate your chosen 5 Global markets +EDV with 3 month looking back period but i only got about 18%

annual return.

I tried using also close prices , open prices but the results were the same.

I also simulated the "perfect" strategy that means i bought the ETF

that was about to have the best performance in the coming month as if i had a crystal ball , i did this just to check

what is the potential return of the strategy. I got a result of 48% , that means that if i knew the future the maximum

i could have done is 48%.

Based on my simulations It is unlikely that based on momentum one

can reach 41% , momentum is only one of many forces that influences the price.

01 Oct 2013, 02:30 PM

Frank Grossmann, Contributor

Author’s reply »

already performing 20% since 2003. You probably may have one day slippage between sell and buy. There have

been some other readers in this thread which could also backtest about the same performance.

There must be some error in your calculations. A simple MDY-EDV rotation with 3M look back is

02 Oct 2013, 06:00 AM

I use end of week close and buy in the next Monday open , I checked my code maybe there is some mistake , but

even a 1 day slippage cannot explain this results.

Did you check if you do not have a forward looking element in your code ? this is quite a common mistake .

All the momentum rotation strategies i know , with or without volatility does not get more the 15% above bench

mark return.

I am also referring to adaptive looking back parameter.

See also Tiziano C comment , we have almost the same results.

02 Oct 2013, 06:36 AM

varan You have to use prices that reflect dividends. Since you are using open prices, it may be that you are not.

If you are using Yahoo Finance, it is easiest to use adjusted close prices.

02 Oct 2013, 11:01 AM

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A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003 | Seeking Alpha

Hello Elran,

I made an error in my computations and the results Mr. Grossmann obtained are correct. Make sure the

series you are using are correct. You can easily test the strategy on etfscreen and get an annual return

above 30%

21 Oct 2013, 10:16 PM

Frank Grossmann, Contributor

Author’s reply »

clear that you can not sell and buy in reality at close, however you can sell and buy very close together the next

day.

In my backtests I always sell and buy at the same close price. You have a night inbetween. It is

02 Oct 2013, 07:31 AM

Elran you can do a simple test to check your system :

Get 2 random data series and run your system on them , if the system still have big profit it means you have a

problem , since random data should not exhibit any momentum characteristics .

I believe you can use Mathlab to get this random data.

This is a good check for any system to make sure that we do not have any forward looking or any other biases

that distort the back-testing.

02 Oct 2013, 10:16 AM

Frank Grossmann, Contributor

Author’s reply »

and you can insert the 6 ETFs (MDY EEM FEZ ILF EPP EDV). Already with the fully automatic basic settings you

make about 32% per year. Disadvantage of Sectorsurfer is that you do not really know what they are calculating

internally. Also you can not run optimizations on the parameters.

I did all development with Quantshare and I am pretty sure, that there is no error in the backtests. Also I am

playing the strategy since several years and the returns are the returns published on the my website

http://bit.ly/15IIHte, however of course you have to subtract your trading fees and spreads. But this depends of

your broker.

You can make a test with SectorSurfer (http://www.sumgrowth.com). You can register for free

02 Oct 2013, 11:00 AM

Elran When you say the return are published in your website , you mean backtesting or real time return ?

do you have the real time return from the time you started publishing your signal ?

03 Oct 2013, 10:35 AM

Frank Grossmann, Contributor

Author’s reply »

2010, but my return and also yours will be slightly different. From my published close-to-close returns you have to

substract your trading fees, the ETF spread and the slippage between buying and selling because there are

normally some minutes between the trades.

The return published on the website is the real ETF return. I invested in these strategies since

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A Global Market Rotation Strategy With An Annual Performance Of 41.4% Since 2003 | Seeking Alpha

Also I normally did not buy the ETFs like MDY, but I bought the S&P400 Future which in fact increases my

performance, because it has no management fee. This also can make a small difference. Also I could not always

reinvest exactly 100% of my capital because 1 Future is about 40'000 US$.

But the actual performance is very close to the published performance if you have a good discount broker.

04 Oct 2013, 08:57 AM

Tiziano C. Hello, I really appreciate this strategy and I have started investing in it with my own funds. I follow exactly the

same process as that one described by selecting the best region out of the ETFs listed by Mr. Grossman. Only

difference is that once I spot the top region (say IEV is the best performer, so Europe is the region) I invest in the

small cap ETF of that region ( MSCI Europe small cap TRN) as the performance is quite higher and it outweighs

the less liquidity. What do you think about that? Same volatility ETFs (the 5 etfs listed by Mr. Grossmann) decide

the region to invest in and once selected the region you invest into the small cap ETF of that region. Second

question: can you reccommend any Swiss bank which has low costs, especially low commissions, where I can

implement this strategy without paying tons in commissions? Thank you

21 Oct 2013, 10:20 PM

Would the small caps also come with higher volatility

22 Oct 2013, 09:20 AM

Frank Grossmann, Contributor

Author’s reply »

markets. The Strategy more or less just gives you the date when you have to switch from one market to

another. I myself always buy the underlying futures.

However I do not think that this will improve a lot the performance. With small caps you pay better

performance with more volatility. It is just a kind of leverage.

There is absolutely no problem to replace the ETFs with other similar ETFs oft he same

22 Oct 2013, 11:10 AM

Frank, it seems like this combination of ETF's may perform very poorly should the Federal Reserve taper QE, as

the stock funds and EDV and SHY would become positively correlated and fall in value. What are your thoughts

on this possibility?

22 Oct 2013, 09:39 AM

Frank Grossmann, Contributor

Author’s reply »

financial crisis again, then I am sure that treasuries will automatically become a save haven asset again.

If during tapering the stock markets go up, then tapering is not a problem. If there is a real

22 Oct 2013, 11:16 AM

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I decided to give Mr. Grossmann's strategy a try. I've been attempting numerous backtests since I first read the

article. However it has become apparent to me that I can't replicate his methodology and therefore, although I

have very good results, my results are not the same as the GMR Strategy.

I did invest in FEZ last month before I subscribed to Mr. Grossmanns' strategy, and I am satisfied with its

performance. If GMR replicates anywhere near the historical performance I won't have an issue with my $30 each

month.

22 Oct 2013, 12:04 PM

varan For those interested (as it seems that many are having difficulty in backtesting) here are the results I get for

various cases by using ranking on the basis of total returns alone. Separate results for 2009-2013 are here as

EDV has been around only since 2009. Since a similar ETF, TLT, has been around since 2003, the results based

on using TLT instead of EDV are also shown.

Case A: IJJ IEV EEM ILF EPP ZIV EDV

2003:2013 CAGR 44.8% Max DD 20.2% Sharpe 1.56 Sortino 3.63

2009-2013 CAGR 53.7% Max DD 20.2% Sharpe 1.51 Sortino 3.66

Case B: IJJ IEV EEM ILF EPP ZIV TLT

2003:2013 CAGR 39.7.8% Max DD 19.2% Sharpe 1.43 Sortino 3.36

2009-2013 CAGR 50.4% Max DD 19.2% Sharpe 1.56 Sortino 3.67

Case C: IJJ IEV EEM ILF EPP EDV

2003:2013 CAGR 34.2% Max DD 17.6% Sharpe 1.21 Sortino 2.91

2009-2013 CAGR 29.9% Max DD 17.6% Sharpe .99 Sortino 2.31

Case D: IJJ IEV EEM ILF EPP TLT

2003:2013 CAGR 32.1 Max DD 17.1% Sharpe 1.29 Sortino 2.97

2009-2013 CAGR 32.9% Max DD 16.7% Sharpe 1.24 Sortino 2.85

It appears that if you don't use ZIV, replacing EDV by TLT may be better.

The most remarkable result (apart from the mouth watering CAGR) is the low drawn, which is better than the

drawdown of the best of balanced funds which are ostensibly there to provide a low volatility portfolio.

22 Oct 2013, 12:40 PM

Market Map, Contributor Are these results using the rules from a previous post of yours : " On first trading day of every month: use

the adjusted close prices on the last trading day of the previous month and the last trading day of the

month three month prior (Sept to Dec for Jan 1, Oct to Jan for Feb 1, and so on) to compute the return for

each. Buy the one with the highest return at the closing of the first trading day of the month " ?

22 Oct 2013, 09:12 PM

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Yes. Exactly. For back testing with the Yahoo Finance data this is the best and the most convenient way to

do it.

Of course, on Fidelity at least, you cannot give an order to buy at close unless you buy in the multiples of

hundred shares (or use extended hours trading). So there are bound to be some differences between the

realized and theoretical returns.

23 Oct 2013, 10:22 AM

Market Map, Contributor Could you supply a spreadsheet and/or an asset allocation diagram of this ? thanks

23 Oct 2013, 07:02 PM

TrendXplorer, Contributor A few weeks ago I finalized my translation of GMR into "thinkscript". See this (http://bit.ly/17MvaMJ) chart.

Below the equity curve a history line is painted showing the previous allocations (yellow arrow).

Furthermore the chart labels above the equity curve specify the number of months held for each ETF as

well as their contribution to realized profits.

Rotation takes place on the first trading day of the new month. In this example chart capital is allocated to

the top ETF based on values for ROC(63) at EOD on the last trading day of the previous month.

(My backtests show optimum results for 66-68 days).

24 Oct 2013, 04:26 PM

Tiziano C. thanks for sharing. But what do you mean with "locked profit" in the graph? How can you lock the profit?

30 Oct 2013, 07:31 AM

TrendXplorer, Contributor Admittedly "locked" might not be the most appropriate description. Perhaps "realized profit" is the better

one for reporting the overall profit of liquidated positions.

30 Oct 2013, 08:52 AM

rabsparks There's an old story about the woodsman who had time on his hands being that winters were harsh and game few

and far between. He decided that he would machine a tiny screw to show the Swiss how good he was. So he

worked on the screw for months and sure enough machined the tiniest of screws.

He then shipped the screw to Switzerland.

He waited many months, but low and behold one day he got his screw back. He carefully inspected the screw and

found that the Swiss craftsmen had hollowed out the screw, threaded it, and then put a cap on the threaded

screw.

Inside he found the tiniest of screws.

22 Oct 2013, 12:55 PM

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varan fables are interesting. real results are much more useful.

23 Oct 2013, 12:47 PM

rabsparks Ask and ye shall receive: As of today, FEZ (which I bought around a month ago) is showing a 3.8% return.

23 Oct 2013, 03:22 PM

varan This year FEZ has been better. But since 2003, not much difference between using IEV and FEZ .

23 Oct 2013, 03:44 PM

rmpalpha It appears to me that many of the above backtests have omitted the author's Volatility component. I have

backtested the GMR strategy on the etfreplay.com website using Momentum (3-months; weight 70%) and

Volatility (20-days, weight 30%), evaluated monthly. The results did not match the author's results exactly because

the above criteria are not the exact criteria of the author, but the results were close enough that I now use the

above strategy as a significant component of my personal investment portfolio.

One question to Frank: On etfreplay's backtests, they Sell at Close the last day of the evaluation period, and Buy

at Open the following day. Is that what you recommend, or do you recommend Sell at Close AND Buy at Close

the last day of the evaluation period (or Sell at Open AND Buy at Open the following day)? I doubt the results

would change significantly, but am curious what you think?

23 Oct 2013, 10:12 AM

Frank Grossmann, Contributor

Author’s reply »

short time (some minutes). I did backtests and it does not really matter if you do this the first, second or

third day. However sell and buy should be close together with no night inbetween.

I normally sell the old ETF and buy the new one the first day of the month within very

24 Oct 2013, 09:44 AM

rmkiefer In changing from one trading period to the next, I think simple is better. For example, on the first trading day of the

month you can sell the current ETF and buy the new ETF at your convenience and probably get the same results

as Frank's. That's as long as you do so with the buy and sell occuring within a couple of minutes of each other.

23 Oct 2013, 12:19 PM

Frank,

Interesting reading and concept.

While the newsletters work for the hands-on Alpha Seekers,

how about Rent a Strategy offering a family of mutual funds for those of us that are both time and mathematically

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challenged?

Merci vilmal

24 Oct 2013, 10:55 AM

Frank Grossmann, Contributor

Author’s reply »

Switzerland. In fact this is more of a hobby for me and I like the contact with my customers.

However if someone in the US wants to open a mutual fund for this strategy, then I am ok to support him.

I don't want to open a mutual fund. This is very complicated from the compliance side in

30 Oct 2013, 12:44 PM

And the winner for November 2013 is FEZ with a total return of 13.19% over the last 3 months ( July 31 till

October 31). The second place goes to EPP with 11.3% return over the same period.

02 Nov 2013, 11:18 AM

berry Calculations seems a bit off. I get 11.4% for FEZ and 10% for EPP.

02 Nov 2013, 11:43 AM

varan According to Yahoo Finance

FEZ 13.5%

EPP 11.4%

IEV 10%

02 Nov 2013, 01:16 PM

DREW Seeker I'm just guessing the differences may have to do with:

1. Using the open or the close

2. Using (7/31/13 or 8/1/13) to 10/31/13

I think Varan has also mentioned the concept of adjusted close which would include dividends.

03 Nov 2013, 06:16 AM

I had trouble reconciling my calcs with Mr. Grossmann's numbers, so I emailed him.

In Mr. Grossmann's response I noted, "I think the weightings have changed. Try with 80 20. I use a walk forward

optimization. The weights change over time to adapt to different market environments."

So all of us trying to reproduce his calcs have probably embarked on a fruitless voyage.

03 Nov 2013, 10:11 AM

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varan You should actually thank him for describing the basic idea. Why should he give out all the details?

03

Nov 2013, 10:23 AM

berry "A fruitless voyage" indeed. I too am a subscriber to several of his reports and can see no possible way

for ZIV to rank where it has given it's 29% volatility, unless volatility somehow becomes a negative force at

some point.

I do believe we'll have to continue to subscribe if we want to indeed "see" his monthly results :)

cheers

03 Nov 2013, 02:49 PM

I have chosen to subscribe to GMR, which does not include ZIV. But with things relating to GMR in

somewhat of a state of flux, I don't see how one can match Mr. Grossmann's formula(s). I know one can

figure out which ETF is Number One, but that's about it.

03 Nov 2013, 03:19 PM

varan Good for you.

No fruitlessness here. I am doing just fine rolling out my own.

03 Nov 2013, 03:21 PM

berry Yes, I believe we can mostly replicate the top pick until extreme volatility hits most markets, as it would in

times of turmoil. Once there, I believe we'll likely have to rely on Mr Grossman's "magic formula" to predict

what course we need to follow.

If it can indeed do that, it's well worth the cost.

03 Nov 2013, 04:02 PM

I would be careful with the ZIV. The period of back testing is not very long (just three years).

03 Nov 2013, 04:58 PM

rabsparks I did thank Mr. Grosssmann by subscribing to his monthly "strategy". Not that I owe you an explanation, but I find

interesting that everyone, or a lot of people, are attempting to replicate his service.

Better read my comment again.

03 Nov 2013, 12:41 PM

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Market Map, Contributor Are you trading out of Switzerland using "U.S." ETF's ? What tax do Swiss citizens pay on short term cap gains ?

04

Nov 2013, 09:26 AM

I am not trading in Switzerland, but rather in US ETFs. I have no idea of what the Swiss pay in short term

gains. As far as short term gains are concerned, as long as GMR produces anywhere near the returns

that it has in the past, I'll gladly pay the US government their share of the profit.

04 Nov 2013, 10:47 AM

Frank Grossmann, Contributor

Author’s reply »

shares or ETFs. We only pay taxes on dividends. I like to trade US ETFs in CFD form. With CFDs I can keep my

capital in Swiss Francs.

The bad thing is that I have also to pay about 25% US Taxes on dividends of bond ETFs

We are in the good situation in Switzerland that we do not have to pay taxes on profits from

07 Nov 2013, 10:19 AM

"We are in the good situation in Switzerland that we do not have to pay taxes on profits from shares or

ETFs. We only pay taxes on dividends"

Seriously? No capital gains tax, only dividends?

I might have to move their with my wife.

07 Nov 2013, 01:10 PM

berry Not an easy place to get into.

Good luck.

07 Nov 2013, 04:20 PM

Baboon Aren't CFDs like futures having large cost of carry?

08 Nov 2013, 02:23 PM

What keeps one out? Educational background? Assets (so you aren't a burden as soon as you get

there)?

08 Nov 2013, 03:53 PM

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How come you dont mention in this or your BRS strategy that your backtests are longer than the

availability of the ETFs? BOND/CWB not available in 2008 and EDV not in 2003-08

appear to very flawed

so your backtests

20 Nov 2013, 03:06 PM

Frank Grossmann, Contributor

Author’s reply »

the bond rotation you had TLH-JNK (Treasury-Junk bond) since 2007. This sub strategy is the basement

of the strategy and returned 16% annually since 2007. BOND and AGG are just elements to reduce

volatility. CWB goes hand in hand with JNK.

A rotation strategy is never static. You can always add new ETFs if this makes sense.

Each rotation strategy can be decomposed in some basic sub-rotation strategies. For

28 Nov 2013, 03:21 AM

Doug+Taylor+ Thanks Frank, very interesting. I am going to try this with a small portion of my portfolio and see how it works. One

question though, can you post what the 2008 and 2009 picks were to get such impressive market returns? Really

enjoyed reading this.

17 Nov 2013, 06:54 PM

Frank Grossmann, Contributor

Author’s reply »

Just look on my website http://bit.ly/15IIHte. You will find there all investments.

28 Nov 2013, 03:23 AM

I see EDV was the one that went up in 2008 from your earlier post. Was it held for most of the year?

18 Nov 2013, 12:54 AM

A complete list of all holdings is available on his site - url in his post above.

cheers

18 Nov 2013, 07:35 AM

Thanks berry

18 Nov 2013, 10:21 PM

Dear Frank,

I will subscribe to your strategy. I am thinking to invest all my capital in the GMR strategy and bond strategy, but I

am tempted to invest all in GMR as it delivers a more than double return. I don't want to have other investments

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such as funds and in general "buy and hold investments". Do you think a 20% in the bond strategy and 80% in the

GMR strategy is appropriate? Vielen Dank :)

By the way: I checked some monthly performances of your GMR strategy and some seem to high (for example

ILF did not perform 6.25% in December 2006 but something around 3%). But still recalculating all monthly

performances I ended up with 38% annually.

24 Nov 2013, 04:31 AM

rabsparks I took note of your 12/2006 ILF performance and decided to run ILF through http://etfreplay.com.

According to etfreplay, ILF returned 6.3%. Your analysis may have omitted dividends.

26 Nov 2013, 04:10 PM

Frank Grossmann, Contributor

Author’s reply »

Dont't look only on return. GMRS has double return, but also twice the risk (volatility) of

the BRS

28 Nov 2013, 03:26 AM

berry Unless "black Friday" brings us something rather dramatic in the market (unlikely for a shortened trading day),

FEZ will again lead the pack for GMR.

26 Nov 2013, 06:25 PM

berry Apologies - kids came home from school and I got a day ahead of myself. In my world I thought today to be

Thanksgiving.

Anyway, long FEZ.

27 Nov 2013, 08:44 AM

TrickPony If you considered volatility I think EPP was the pick for November and EMM is the leading horse going into

December.

27 Nov 2013, 12:28 PM

varan November returns:

EPP -2.9%

FEZ 1.2%

IEV 1.1%

Although one month does not make or break a strategy, looks like you would have been better off in

November if you did not consider the volatility.

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27

Nov 2013, 12:32 PM

berry FEZ was the recommendation for November and will likely be for December unless there's quite a change in his

methodology or the market. EMM isn't a player.

27 Nov 2013, 12:48 PM

Hello Berry

When was EMM removed from the GMR mix?

I see the problem. I was still using the original IEV instead of FEZ.

Wow, what a complete different line up for November & December by just using a different European ETF! I

actually would have made some money in November instead of a 2% loss.

My data from etfreplay.com

28 Nov 2013, 01:10 PM

berry Sorry, I merely meant EMM wasn't a player in the context of being in the running for a top spot. They are still

included in the GMR strategy.

28 Nov 2013, 09:25 PM

rabsparks Hey Berry: I think that you have a typographical error. I don't think that EMM is a ETF in GMR. I believe

that you mean EEM.

30 Nov 2013, 02:04 PM

Yeah FEZ in the last two months and most likely going into December FTW

29 Nov 2013, 09:21 AM

johnmarg Am I missing something. Where is FEZ listed in the strategy above

29 Nov 2013, 03:58 PM

johnmarg Never mind I just saw where Fez was added

29 Nov 2013, 09:16 PM

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Hi Frank

,

What a great article and your follow-ups are greatly appreciated.

I'm still a little confused on the starting date for figuring out which ETF has the best total return for the last three

months. Should I use a starting date of August 30th and the closing prices as of August 30th or use the starting

date of Sept. 2nd and the closing prices of Sept. 2nd. with the ending date of Nov. 29th?

Actually, I'm using ETFreplay.com which gives me the option of using results for the last 3 months. Is that time

period accurate enough? Thank you for your patience with the ones that don't have any experience with this stuff.

Sincerely,

Wayne

07 Dec 2013, 08:57 PM

Frank Grossmann, Contributor

Author’s reply »

after the closing. However you can also use opening prices at the beginning of the month. It makes not a big

difference.

I am using closing prces of end month, because then I have time to do the ranking calculations

08 Dec 2013, 11:28 AM

berry I have created a Windows based, utility which allows you to rank certain ETF groupings based on performance

and volatility. It provides an approximation of Mr. Grossman's GMR, GMRE and Bond ETF strategies.

It does not provide the same detailed analysis provided in his newsletters. It provides an approximation of

performance using the methodology he has provided in this article.

It is available at http://m8e.com/etf

08 Dec 2013, 12:13 PM

Berry,