This week there were no position changes in the ETF Country Plus model. IFN reached its first profit target Friday and the stops and targets model took off 1/3rd of that position. Our current three positions are FXI, TMF, and IFN. For those trading the “Stops & Targets,” TMF is only 1/3rd of a position and IFN is 2/3rds of a position.
The MSCI World Index closed the week up +0.38%. The ETF Country Plus model ended the week up +0.24% (The Stops&Targets model was up +2%). The ETF Country Plus Strategy is up +21.02% year-to-date compared to its benchmark, the MSCI World Index, which is now up +6.13% year-to-date.
This Week’s Strategy Lesson: Synergy: A Whole That is Greater Than the Sum of Its Parts
When we first sat down to design and build the ETF models we always had as one of our intentions to build multiple models, all with the same basic rules, but that would focus on different areas of the financial markets. We now have three models, the Sector Plus, the Country Plus, and the Complete (which adds in the Global Macro Plus model).
An important element to our design was that each model should be able to stand on its own two feet and weather the market cycles and storms. That is one reason why each model has the mix of ETFs that it does.
This also includes a few ETFs that overlap in the models. As far as exact matches, the Sector and Country model both have TMF and the Sector and Global Macro model both have SDS. There are some other areas of close overlap, as all the models have exposure to interest rate and different U.S. index short ETFs as well as some overlap with regional vs country specific ETFs.
Each model uses the same rules to calculate the Trend Strength Indicator and the same rules for rotating in and out of positions, but the composition of potential ETF holdings is different.
We saw this with TMF recently. The Country Plus model had an entry into TMF months ago that already reached two profit targets. The entry was based on the relative TSI rankings of its model components.
The Sector Plus model, which tends to have more leveraged ETFs (and higher TSI values) had an entirely different composition of ETFs at the top of its rankings at the time. TMF only recently rose into the top three in the Sector ranking. While the latest TMF trade in the Sector model was closed for a loss, the overall rotation methodology remains a powerful concept.
Risk Adjusted Return
However, just as important to us as their independence, we wanted to design models that would function together in a synergistic way. In portfolio theory, this basically means that we want to get a higher return for each unit of risk (volatility) that we take. So while if you knew ahead of time which model was going to be the best during any given month, it would still give you a higher absolute return to only trade that model, trading all the models would give you the highest “risk-adjusted” return.
The “Sharpe Ratio” is one common way the industry uses to measure risk-adjusted returns. The calculation is based primarily on comparing the average returns of a portfolio compared to its standard deviation. It’s not a perfect calculation as it penalizes big moves up and down equally (I don’t think investors get upset when they see their portfolio gap up overnight, its more the gap downs that they get worked up about).
The calculation can also vary by a wide margin depending on what time period is evaluated as one big outlier (say a +5 or -5 period when the average is +/- 1) can sway the standard deviation significantly. However it remains an industry standard convention and by running this analysis on our portfolio we can see if and how the models can work together to provide a better risk/return profile.
The Sharpe Ratio for the three models (Sector, Country, and Global Macro) for the last trailing twelve months fell between .90 and .96. These are considered good scores, especially when viewed in combination with the absolute returns of each model.
However, the Sharpe Ratio for the ETF Complete Portfolio (which treats all three models as one portfolio) came out to be 1.20, in the range of a 30% higher score over any individual model. Meaning that keeping your risk exposure constant, you would expect to get a higher return trading all three together than even the best performing model (position sizing to keep risk constant).
This is evidenced in the chart below where you can compare the relative volatility and performance for all the models over the last trailing 12 months. There are many times where one model might be down in a week and one of the others is up evening out the week’s returns to be an average of the two (or three). This is why it is important to diversify and use multiple systems, whether or not its ETF systems, some other service, or your own independent trading, you can get positive synergistic effects from using multiple methods of trading that work well together.
The Current Condition of the Model
For the country model, we are in FXI, IFN, and TMF. IFN reached its first target on Friday and we took off 1/3rd in that position in the Stops and Targets Model. TMF has sold off significantly since hitting our second profit target but still narrowly remains in the top three rankings.
Stay tuned to daily updates for any position changes.
Here is a summary of the weekly performance of all the ETFs that the strategy monitors:
Best wishes for your trading,
James Kimball
Trader & Analyst
MarketGauge