Running with Momentum: Momentum ETF Portfolio

Steve Turner Burlington Stock Trading Systems Meetup October 19 2016

Disclaimer

The content in this presentation is for educational and illustrative purposes only and does not constitute either investment advice or buy/sell recommendations. I am not a licensed investment advisor and make no recommendation either to purchase or sell any particular stock, bond, option or security of any kind. Trading in the stock market involves a high degree of risk and you may incur financial losses if you engage in such activity.

Credits

1.  Bob Turnbull’s à U.S. 2&5 SMA portfolio 2.  Tom Cauley’s à U.S. Midas ETFs portfolio 3.  Arthur Hill article à Momentum System for Trading

Asset Classes 4.  Petra Hess’ suggestion à “Create a portfolio with based on

the top performing ETFs”

My Situation

I want to make money I work full time

I want above average returns

with minimal work required

during working hours

Guiding Principles

1.  I will make money in up and down markets. 2.  I will make more money in up markets than in down markets. 3.  Generally, securities that are “running” tend to keep running. 4.  If something is running – up or down – I want “a piece” of it. 5.  It’s okay to step aside (be in cash) if – and only if - nothing is

running. 6.  I will not catch the exact bottom or the exact top. I’m very

content with capturing the “meat” in the middle. 7.  I make more money when I trade less.

Portfolio Objectives

1.  In up markets, to beat the return on the TSX

2.  In down markets, to achieve a positive return

3.  Minimal and easy trades §  Minimal à very few trades §  Easy à high ADV and low bid/ask spreads

Overall Approach

What to buy: §  Momentum ETF watch list

When to buy: §  Buy when each of the momentum ETFs are

amoung the best performing (relative performance to one another)

§  Sell when they are no longer the best performing

Overall Approach

Hop off Old Nelly

Start riding Secretariat!!!

Momentum ETF Watch List 1.  Canadian ETFs only 2.  Price > $5 3.  ADV > 30k-40k+ (generally) 4.  Diversified:

§  Markets §  Sectors §  Capital gain vs. income oriented §  Volatility §  Inverse / contra

5.  Minimal overlap 6.  The watch list must be kept to a manageable size (more isn’t

better)

Momentum ETF Watch List BroadMarket CanadaLargeCap(TSX60) XIU

CanadaSmallCap XCSS&P500 XSPRussell2000 XSU

Sector Gold XGDEnergy XEGFinancials XFNJuniorGold ZJG

EquityIncome PreferredShares ZPRDividends XDVCoveredCallBanks ZWBCoveredCallUnRliRes ZWUREIT XREMonthlyIncome XTR

VoliRlity InverseVIX HVIVIX HUV

Inverse TSX60 HIXS&P500 HIU

Performwellingenerallyrisingmarkets

Performwellingenerallyfallingmarkets

Top Momentum ETFs (Up-Market)

Up-market: §  Buy the top 5 performing ETFs as measured by:

§  RT (10 day SMA) > 1.1 §  Sort using top RT (10 day SMA)

RT and RT (10SMA) - XIU

RT and RT (10SMA) - ZJG

Down-Market: 1.  Buy long positions in down-market ETFs (HIX, HIU, HUV) if:

§  There are less than 5 up-market ETFs that qualify AND §  RT (10SMA) > 1.0 for the down-market ETFs

2.  Sell when either: §  Any regular up-market ETF buy conditions are meet (have a

bias to an upward trending market) OR §  RT (10SMA) reverses by more then 0.05

3.  Can have a mix of up and down-market ETFs 4.  Down-market ETFs can be 100% of portfolio *** Caution: This scenario has not been fully tested yet ***

Top Momentum ETFs (Down-Market)

RT and RT (10SMA) For HIX

Back Test

§  $100,000 portfolio §  $9.99 commission §  All trades at close on Friday §  February 19 (DEW up) to September 28 §  100% manual back test

ETF Momentum Tracking Sheet 19-Feb 26-Feb 04-Mar 11-Mar 18-Mar 25-Mar 01-Apr 08-Apr 15-Apr 22-Apr 29-Apr 06-May 13-May 20-May 27-May 03-Jun

HIU 2HIXHUV 4 3HVI 3 3 3 3 3 4 4 4 5 5XCS 1 2 3 3 2 2 1 2 2 1 1 2 2 2 3 2XDVXEG 2 3 3 2 1 1 2 2 1 1 1 2 3XFNXGD 5 5 5 4 4 5 4 4 4 4 4 3 3 3 1 1XIUXRE 2 1 1 1XSPXSUXTRZJG 3 4 4 5 5 4 5 5 5 5 5 5 5 5 4 4ZPRZWBZWU 1 1#TRADES 5 1 1 1 1

ETF Momentum Tracking Sheet

19-Feb 26-Feb 04-Mar 11-Mar 18-Mar 25-Mar 01-Apr 08-Apr 15-Apr 22-Apr 29-Apr 06-May 13-May 20-May 27-May 03-Jun 10-Jun 17-Jun 24-Jun 01-Jul 08-Jul 15-Jul 22-Jul 29-Jul 05-Aug 12-Aug 19-Aug 26-Aug 02-Sep 09-Sep 16-Sep 23-SepHIU 2HIXHUV 4 3HVI 3 3 3 3 3 4 4 4 5 5 4 3 3 4 4 5 5 5 5 5 5XCS 1 2 3 3 2 2 1 2 2 1 1 2 2 2 3 2 2 3 3 3 3 3 2 2 2 2 2 1XDVXEG 2 3 3 2 1 1 2 2 1 1 1 2 3 1 2 2 2 1 1 1 3 2XFN 1 1 3XGD 5 5 5 4 4 5 4 4 4 4 4 3 3 3 1 1 3 4 4 4 4 4 4 4 3 3 3 3XIUXRE 2 1 1 1 1 1 1 2 2XSP 2 3 3 2XSU 1 1 1 1 1 2 4 4 4 4XTRZJG 3 4 4 5 5 4 5 5 5 5 5 5 5 5 4 4 5 5 5 5 5 5 5 5 5 5 4 4 2ZPRZWB 1ZWU 1 1#TRADES 5 1 1 1 1 1 2 1 2 2 2

Summary of Trades

Count = The number of weeks in which a given ETF was held (out of 32) Sum = The total score for the ETF during the test period (cumulative weekly score)

Results As Of September 30

Trades: §  Only 11 of 32 weeks had trades §  19 trades (5 initial plus 14 switches) §  $330 in commissions

Returns: §  12 winning trades / 7 losers (63%) §  33% return (versus 15% on TSX) §  11% maximum drawdown

Equity Curve

Routines

Daily: 1.  None Weekly (15 minutes): 1.  Identify top 5 ETFs in VectorVest 2.  Update momentum ETF tracking sheet 3.  Execute trades as required Quarterly (60 minutes): §  Review and update watch list

Potential Enhancements

Watch List: 1.  Use different sector or market ETFs 2.  Include leveraged ETFs 3.  Use stocks instead of ETFs 4.  Remove ETFs that are likely not going to be selected 5.  Include commodity ETFs

Potential Enhancements

Selecting The Top Momentum ETFs: 1.  Pick fewer ETFs (vs. 5) 2.  Apply more weight for the top ranked ETFs (vs. 5x20%) 3.  Change the RT smoothing (vs. 10 SMA) 4.  Adjust the minimum RT (vs. 1.1 up / 1.0 down) 5.  Top 5 ETFs by 10-day rate of change 6.  High or rising RT (vs. current is just high RT) 7.  Ignore small variances in the RT (10SMA)

Strategies for Starting this Portfolio

1.  Jump in: §  Purchase full portfolio of qualifying ETFs

2.  Wade in: §  Buy part positions in each of the qualifying ETFs §  Buy full positions on a few of the qualifying ETFs

3.  Dip your toe in: §  Buy new positions only as they meet the buy criteria

Starting A Portfolio On Friday Sept 30, 2016

$20,000 in each of: §  HVI – Inverse volatility S&P500 §  XSU – Russell 2000 §  XFN – Canadian financials §  ZWB – Canada banks with covered calls §  XIU – Canada large caps

HVI

XSU

XFN

ZWB

XIU

Final Thoughts

1.  I don’t expect the current pace of returns will continue 2.  I fully expect that this strategy will work better in the U.S. 3.  I expect that this approach will:

§ Work very well in up markets § Work well (but not as well) in down markets § Not perform well during:

§  The transition from up to down markets (and vice versa) §  Flat/consolidating markets §  During periods of sector rotation

Final Thoughts

Running

Consolidating

Transitioning

Final Thoughts

19-Feb 26-Feb 04-Mar 11-Mar 18-Mar 25-Mar 01-Apr 08-Apr 15-Apr 22-Apr 29-Apr 06-May 13-May 20-May 27-May 03-Jun 10-Jun 17-Jun 24-Jun 01-Jul 08-Jul 15-Jul 22-Jul 29-Jul 05-Aug 12-Aug 19-Aug 26-Aug 02-Sep 09-Sep 16-Sep 23-SepHIU 2HIXHUV 4 3HVI 3 3 3 3 3 4 4 4 5 5 4 3 3 4 4 5 5 5 5 5 5XCS 1 2 3 3 2 2 1 2 2 1 1 2 2 2 3 2 2 3 3 3 3 3 2 2 2 2 2 1XDVXEG 2 3 3 2 1 1 2 2 1 1 1 2 3 1 2 2 2 1 1 1 3 2XFN 1 1 3XGD 5 5 5 4 4 5 4 4 4 4 4 3 3 3 1 1 3 4 4 4 4 4 4 4 3 3 3 3XIUXRE 2 1 1 1 1 1 1 2 2XSP 2 3 3 2XSU 1 1 1 1 1 2 4 4 4 4XTRZJG 3 4 4 5 5 4 5 5 5 5 5 5 5 5 4 4 5 5 5 5 5 5 5 5 5 5 4 4 2ZPRZWB 1ZWU 1 1#TRADES 5 1 1 1 1 1 2 1 2 2 2

Final Thoughts

Feb 19 – April 1

(6 weeks)

Apr 1 – Aug 15

(19 weeks)

Aug 15 – Sept 30

(7 weeks)

Qualifying ETFs* 7 15 6

Average of 5 Top SMA10 RT 1.36 1.44 1.21

Switches 4 3 7

Return 0% 40% -6% * As of February 19, May 15, September 30