There are many components and moving pieces that fit together to make up the ETF models. This series will focus on how the ETF models are constructed and the best practices for following along with them.
At its core, the ETF models are a medium-term trend following trading system. We define a universe of potential trade-able ETFs, we then rank them based on trend strength (using our proprietary TSI) and rotate in and out of the leaders. We have broken down the ETFs into different lists based on what exposure the ETFs give you and different models based on variations of ranking and trading rules.
Sector Conservative – This model ranks 19 non-levered ETFs that focus on U.S. sectors (with some alternative and inverse exposure). The model uses “pure rotation” with no stops or targets. The model will rotate out of a position into the new leader when its relative ranking has dropped sufficiently. This model represents a good lower-volatility way to get U.S. sector/economic exposure.
Sector Moderate (also found in ETF Complete) – This model ranks 19 non-levered ETFs that focus on U.S. sectors but for certain sectors with viable levered ETF-options, it will hold the levered ETF. Unlike the “Sector Conservative,” it employs stops, targets, and re-entry rules. It still rotates in and out of positions to remain in the leaders, but it will also have a protective stop that will put the position in cash for a period if it is hit as well as multiple targets to take money off the table as the positions move deep into the green. The model has medium to higher volatility. It will tend to have higher drawdowns during market corrections but will also tend to outperform the Conservative in a well-trending market.
Sector Aggressive – This model ranks a list of 20 levered and non-levered ETFs that focus on U.S. sectors. The model uses “pure rotation” with no stops or targets and is generally has considerably higher volatility than the other sector models. Due to the rankings being based on both levered and non-levered ETFs, it can often have a significantly different allocation as compared to the Conservative and Moderate sector models.
Country S&T (also found in ETF Complete) – This model ranks a list of 22 non-levered ETFs that focus on international country-based ETFs. The model will rotate out of a position into the new leader when its relative ranking has dropped sufficiently, but also employs stops and targets to protect against large drops and take some profits off the table for the winning trades. The model will occasionally hold a leveraged ETF when U.S. Treasuries or the SPY ETF tops the relative rankings.
Global Macro (only found in ETF Complete) – This model ranks a list of 22 leveraged and non-leveraged ETFs focused on international trends in regions, commodities, financial instruments, and currencies. The model uses stops and targets. This model has some of the highest access to alternative and short investments but can also be subject to some quick reversals (positive and negative) due to its ability to concentrate on the strongest trend and apply leverage.
The ETF Complete model holds the positions found in the Sector Moderate, Country S&T, and Global Macro models.
Trend Strength Indicator
The Trend Strength Indicator is a proprietary indicator we use to measure trend strength. It functions differently than oscillators like relative strength. The calculation looks at a series of different return periods with custom weightings for each. We then rank all of the ETFs based on the relative TSI scores.