The ETF Complete portfolio underperformed the SPY benchmark this week by a little over a half of a percent and about 4% on the year. The Country model remains the strongest of the three component models.
The SPY, along with most of the major indexes, pulled back on the week, off of its recent all-time highs and back into their February-April trading ranges.
We had one position change this week, selling out of SSO on Friday for almost a scratch and rotating into EWH (Hong Kong), leaving us more heavily-weighted Asian equity ETFs. We also reached a profit target in FXI on Monday.
Go to the Model Portfolio to view breakdown of all the ETF Complete Portfolio’s current positions and past performance:
If you have any questions about getting started please drop us an email at: info@marketgauge.com
This Week’s Strategy Lesson: Relative Performance (Part 4)
When you are trying to evaluate the relative performance of a model, trading strategy, stock, or ETF, there are a lot of different metrics to take into account. Over the last few weeks, we have looked at a few of these concepts like rolling average performance or drawdown charts. This week we will close out the series looking at annual performance data.
Performance / Outperformance
Perhaps the most important single metric in looking at a trading strategy is performance, both on an absolute and relative basis. We want to know that a model or trading strategy can deliver solid performance. Here, more is good, but more by itself is usually not enough. Consistency and variability are also important.
If a strategy was up 500% over 10 years, but made nearly all of that in just one year, that doesn’t speak well to the “repeatability” of the results. And ultimately, the use of the historical track record is all about seeing how a strategy performed during different market conditions in the past in an attempt to determine or guess how it will handle future uncertain market conditions.
In the table above, we have included the yearly returns for all the models (2015 is only partial data). The final column is the SPY. It is often used as a “benchmark” because investors can passively buy the SPY ETF and “accept” the average market risk and return, a strategy that requires little work and low costs to maintain.
In the “Totals” section, we have averaged out the performance over the 8+ years of data. You can see that the average returns fall on a spectrum with the Sector Basic offering the highest and Country S&T model with the lowest average of our models but still above the SPY average.
In the final section, I performed the same calculation excluding the largest and smallest return years. The averages tend to go down (because we had some really robust years), SPY being the exception because of its large drawdown of 35% in 2008.
One thing that does change significantly with the removal of the outliers is the Standard Deviation. This is a mathematical calculation that can serve as a quick proxy for risk or variability in returns. Because of the way it’s calculated, a single large variation can have a particularly large effect on this variable.
Typically, investors and traders are more concerned about large negative outliers than large positive outliers. With the exception of the some of the incomplete 2015 data, the ETF models do well in the category with significantly milder negative years than the Benchmark.
Despite the much higher average performance and smaller max drawdown, the ETF models (with the exception of the Complete) still have a significant variability in their returns and performance can change much quicker than the broader indexes. Measuring performance in days and even weeks is less meaningful when you can have significant and fast equity swings.
So far this year, the SPY looks like it very much hasn’t really decided what kind of year it wants to have. The Sector models are certainly lagging, but they have the ability to catch up. And the Country models have been leading the way with strong recent moves in Asia and emerging markets. As we are about 1/3rd through 2015, it will be interesting to watch how the market and models unfold throughout the rest of the year.
The Current Condition of the Model
We had one position change this week, selling out of SSO on Friday for almost a scratch and rotating into EWH (Hong Kong), leaving us more heavily-weighted Asian equity ETFs. We also reached a profit target in FXI on Monday.
In the Buy Zone: IBB, AAJX
For a complete listing of the positions, and TSI rankings of all the ETFs please go to the Model Portfolio section of the ETF Complete Portfolio Member Area
Best wishes for your trading,
James Kimball