spa3etf · 2016. 9. 18. · outperforming the s&p500 and its respective index funds whilst also...

SPA3ETF

Medium Term Strategies for

Investing with

ETFs & Large Cap Stocks

Getting Started Manual Share Wealth Systems September 2016 Version 2.2

Copyright Quantum Methodologies 2016 of 85

Copyright Notice

This document is provided for use by individuals who have purchased Share Profit Advantage™

(SPA™ or SPA3™) for ETFs, or SPA3ETF from Share Wealth Systems Pty Ltd, or any other

authorised re-seller. It is protected by copyright law. The SPA3 Module in Beyond Charts and the

SPA3 TradeMaster software are the property of Quantum Methodologies and are protected by

copyright law. Unauthorised reproduction, distribution or use of the SPA3ETF Module, the SPA3

TradeMaster software, this document, or any portion of it, may result in civil or criminal liability.

Quantum Methodologies will prosecute and defend its copyrights to the fullest extent of the law.

Copyright Quantum Methodologies, 1998-2016.

All Rights Reserved.

First Edition May 2015 (as SPA3ETF Reference Manual)

First Edition, Version 1.4 October 2015 (as SPA3ETF Getting Started)

Second Edition, Version 2.0 May 2016

Second Edition, Version 2.1 July 2016

Second Edition, Version 2.2 September 2016

Share Wealth Systems Suite 101, 75 Tulip Street or PO Box 7374 Cheltenham VIC 3192 Beaumaris VIC 3193 Australia Australia

Phone: 1-800-392-1257 (Toll Free in U.S Only)

+61 3 9585 0300 or Australia only: 1300 STOCKS (1300 786 257)

Fax: +61 3 9585 0777

Website: www.sharewealthsystems.com


IMPORTANT NOTICE

Because the information in this publication is general in nature, it may not be relevant to individual

circumstances. Before making any investment or financial planning decisions, you should consult a

professional adviser who can help you decide whether your decision is appropriate for you.

Quantum Methodologies believes the information provided in this publication is correct. However,

Share Wealth Systems, Quantum Methodologies, licensed distributors, their directors, employees and

agents are not liable for any loss or damage incurred by any person as a result of any error in any

information, opinion or recommendation (whether due to the negligence of Quantum Methodologies,

its directors, employees and agents, or otherwise). This does not limit any rights a person has under

the Trade Practices Act.

Nothing in this publication is, or should be taken as, an offer, invitation or recommendation to buy or

sell any investment.


Table of Contents SPA3ETF Methodology ............................................................................................................................ 6

Introduction ........................................................................................................................................ 6

Objectives of SPA3ETF ............................................................................................................................ 9

Skills Required Objective ..................................................................................................................... 9

Time Objective .................................................................................................................................... 9

Risk Objective ...................................................................................................................................... 9

Reward Objective .............................................................................................................................. 10

Basis for the Reward Objective ......................................................................................................... 11

Summary ........................................................................................................................................... 15

SPA3ETF Investment Approaches ......................................................................................................... 16

Introduction ...................................................................................................................................... 16

SPA3ETF simplest approach, single index ETF .................................................................................. 18

SPA3ETF Relative Strength (RS) Strategy .......................................................................................... 18

SPA3ETF Equal Weighting Strategy ................................................................................................... 19

SPA3ETF RS Strategy with Leverage .................................................................................................. 20

SPA3ETF Equal Weighting Strategy with Leverage ........................................................................... 20

SPA3ETF Sector Strategies ................................................................................................................ 21

SPA3ETF MYO Strategies ................................................................................................................... 21

More complex ETF and Stocks strategies ......................................................................................... 21

Executing SPA3ETF with a single index ETF .......................................................................................... 23

Process .............................................................................................................................................. 23

Executing the SPA3ETF Relative Strength Strategy............................................................................... 24

Process .............................................................................................................................................. 24

Analysing Relative Strength .............................................................................................................. 26

Executing the SPA3 Equal Weighting Strategy ...................................................................................... 28

Process .............................................................................................................................................. 28

SPA3ETF Performance Summary .......................................................................................................... 29

Performance Summary of 4 x ETF Mixes for the RS Strategy ........................................................... 31

Summary ........................................................................................................................................... 35

How does SPA3ETF compare to SPA3 ASX & SPA3 NASDAQ? .............................................................. 36

SPA3ETF Indicators................................................................................................................................ 38

Example of how the ATR_TS is displayed ......................................................................................... 39

Type of data required for SPA3ETF indicators .................................................................................. 40


Relative Strength indicator ............................................................................................................... 42

SPA3ETF in Beyond Charts .................................................................................................................... 43

SPA3ETF Watch Lists ......................................................................................................................... 43

Turning SPA3ETF On / Off ................................................................................................................. 44

Scanning with SPA3ETF ..................................................................................................................... 45

SPA3ETF Ranking Feature ................................................................................................................. 46

Setting up a ROC 126 Overlay in Beyond Charts ............................................................................... 48

SPA3ETF Portfolio Manager .................................................................................................................. 50

Creating a New Portfolio ................................................................................................................... 50

Injecting Cash .................................................................................................................................... 51

Leveraged Position sizing for SPA3ETF RS Strategy Portfolio ........................................................... 51

Starting the SPA3ETF RS Strategy Portfolio ...................................................................................... 54

Leveraged Position sizing for a SPA3ETF Equal Weighting Portfolio ................................................ 54

Starting a SPA3ETF Equal Weighting Portfolio .................................................................................. 56

Entering a New Buy transaction........................................................................................................ 56

Entering a Sell Transaction ................................................................................................................ 57

SPA3ETF in Share Wealth Systems App ................................................................................................ 58

SPA3ETF Alerts .................................................................................................................................. 58

SPA3ETF Ranking ............................................................................................................................... 60

SPA3ETF Status.................................................................................................................................. 61

Suggested ETFs to use in the SPA3ETF RS Strategy .............................................................................. 62

SPA3ETF RS Strategy ......................................................................................................................... 62

Large Cap USA index ..................................................................................................................... 64

Another Large Cap USA index ....................................................................................................... 67

Small Cap USA index ..................................................................................................................... 68

International Emerging Markets index ......................................................................................... 70

SPA3ETF Timing for Stocks .................................................................................................................... 75

Which of the SPA3ETF Strategies to use? ............................................................................................. 77

Some considerations ......................................................................................................................... 77

Investment funds that could be applied to SPA3ETF .................................................................... 77

Time availability ............................................................................................................................ 78

ETF Liquidity .................................................................................................................................. 79

Research Results ........................................................................................................................... 79

Hedging the AUD against the USD ........................................................................................................ 80


How to hedge .................................................................................................................................... 80

How much to hedge .......................................................................................................................... 82

Research Statistics ............................................................................................................................ 82

Getting Started Manual Summary ........................................................................................................ 83

Version 1.1 – May 2015 .................................................................................................................... 84

Version 1.2 – June 2015 .................................................................................................................... 84

Version 1.3 – August 2015 ................................................................................................................ 84

Version 1.4 – October 2015 .............................................................................................................. 84

Version 2.0 – May 2016 .................................................................................................................... 84

Version 2.1 – July 2016 ..................................................................................................................... 85

SPA3ETF Methodology

Introduction

This investing methodology has been researched and developed for investors that fit any one or

combination of the following requirements:

time-poor, but do have as much time per week as they spend watching a half hour TV sitcom

to manage an investment portfolio,

have low investing knowledge, even as low as having never read a single financial article in a

daily newspaper,

have a sophisticated investing knowledge from having spent years investing in the financial

markets,

have a small amount of investing capital, as low as $5,000,

have a large amount of investing capital, as high as $5,000,000, or even more,

aged 18 to 80+.

However one criterion is required, a desire to want to invest for any one or combination of the

following reasons:

To achieve peace of mind and security for one’s financial markets focussed investments by

ensuring that capital is removed from the market in time to avoid large bear markets.

To be empowered and in control of investments through being well organised, structured

and process orientated.

To have a stress–tested and provable process and edge to achieve growth and dividend

income while markets are rising.

To be enlightened on how to be smarter and do better than those that manage mutual

funds.


This investing methodology is the culmination of over 25 years of Gary Stone’s stock market

investing, researching, reading and listening to mentors and investors’ stock market requirements of

all ages from their 20’s to their 80’s. The ambit of Gary Stone’s investing knowledge, experience,

insights and skills have formed the basis for researching and moulding this investment solution to

meet the requirements and objectives stated in these first few pages.

It is the realisation of and the availability to DIY investors of utilising an investing instrument, the

Exchange Traded Fund or ETF, to gain simple access at low cost to a diverse range of financial

markets right across the globe that historically have been confined to investing professionals inside

the industry or to complex instruments such as futures markets on select exchanges.

And then, combining the use of the ETF instrument with unambiguous market timing, through the

science and art of technical analysis techniques and Gary Stone’s knowledge and experience in this

area, to create an investing strategy that is efficient, low effort, profitable and simple to use.

ETFs are a game changer for the DIY mum-and-dad, son-and-daughter and grandpa-and-grandma

investor.

ETFs and using simple technical analysis techniques can lay the foundation to a lifelong investing

strategy that can put an investor way ahead of where they might have been by trying to learn other

more complex and time consuming techniques, or divesting responsibility by handing their money

over to an investment advisor or mutual fund.

To complete this introduction a quote taken from Warren Buffett on page 20 in his February 2014

letter to Berkshire Hathaway shareholders:

“Most investors, of course, have not made the study of business prospects a priority in their lives. If

wise, they will conclude that they do not know enough about specific businesses to predict their

future earning power. I have good news for these non-professionals: The typical investor

doesn’t need this skill. In aggregate, American business has done wonderfully over time and will

continue to do so (though, most assuredly, in unpredictable fits and starts). In the 20th Century, the

Dow Jones Industrials index advanced from 66 to 11,497, paying a rising stream of dividends to boot.

The 21st Century will witness further gains, almost certain to be substantial. The goal of the non-

professional should not be to pick winners – neither he nor his “helpers” can do that – but should

rather be to own a cross-section of businesses that in aggregate are bound to do well. A low-

cost S&P 500 index fund will achieve this goal.

My money, I should add, is where my mouth is: What I advise here is essentially identical to certain

instructions I’ve laid out in my will. One bequest provides that cash will be delivered to a trustee for

my wife’s benefit. (I have to use cash for individual bequests, because all of my Berkshire shares will

be fully distributed to certain philanthropic organizations over the ten years following the closing of

my estate.) My advice to the trustee could not be more simple: Put 10% of the cash in short-term

government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I

believe the trust’s long-term results from this policy will be superior to those attained by

most investors – whether pension funds, institutions or individuals – who employ high-fee

managers.”

Quote, unquote. Emphasis added by the author.


The philosophy of SPA3ETF is based on using “low-cost index funds” but takes it one step further: to

expend a tiny bit more effort to boost returns and reduce risk that is well worth the effort thereby

outperforming the S&P500 and its respective index funds whilst also producing an excellent return-

to-effort ratio.

The tiny bit of extra effort is imperfect, researched and mechanical timing of entry into and exit from

“a very low-cost ….. index fund” rather than merely buying and holding one or a few. This SPA3ETF

Getting Started Manual explains the why, how and what to do to achieve this. The SPA3ETF

Reference Manual provides detailed researched outcomes from following the SPA3ETF processes.

In May 2016, a short list of high profile large cap strong trending stocks was added to the SPA3ETF

Methodology referred to as SPA3ETF Timing for Stocks. This was done after multiple requests from

customers and ensuing research revealed that using the SPA3ETF timing mechanism worked very

well on large cap strong trending stocks.


Objectives of SPA3ETF

This section covers the objectives of the system which are suggested to be, or be part of, the

objectives of the investor.

Skills Required Objective

If an investor has the skills to operate Microsoft Word, recognise the red, amber and green signals at

a set of traffic lights and can click a mouse you will have sufficient skills to execute SPA3ETF.

No investing skills are required as a pre-requisite to execute this process in the market. No technical

analysis, charting, fundamental analysis skills or understanding of financial markets are required. No

market jargon understanding is required. No understanding of any listed company is required, not

what they do, who their management is, what sector they belong to, how that sector is performing,

in which currency they earn the majority of their income, what their long-term debt is, what their

ROE is or what their prospective earnings are.

You don’t have to watch any financial TV shows, read any financial pages of any newspaper,

subscribe to any newsletters, read or subscribe to any financial magazines, speak to any brokers

about stock tips or meet with any financial advisors. Of course you may still choose to but it is not

required for using SPA3ETF.

Besides the basic computer skills mentioned above you will only need the ability to place an entry or

exit transaction on an online broker-dealer platform around 20 times a year, on average, for using

the Relative Strength Strategy, or even less if timing just a single market benchmark ETF, maybe as

little as 5 times a year.

Time Objective

In its simplest form, executing this system should take no longer than it takes to brush one’s teeth

on a weekly basis.

More sophisticated implementations of SPA3ETF may take up to an hour a week. To keep the

analogy going, as long as it takes to brush one’s teeth, shave and shower on a weekly basis. Beautify

instead of shave for lady-folk.

If it takes longer one might be engaging in tasks that are not required to actually execute the

process.

It is even simpler when following a single ETF strategy with a modern smartphone.f

Risk Objective

The Risk Objective is measured in terms of drawdown, or maximum drawdown.

Definition of Drawdown: A drawdown is measured from the time a retracement in portfolio value

begins to when a new high in portfolio value is reached.

A new high is required because a trough can't be defined as having completed and hence measured

until a new high occurs. Once the new high is reached, the percentage change from the old high to


the lowest trough is recorded. The ‘maximum drawdown’ is the largest of all the drawdowns that

occur in the life of a portfolio.

A Risk Objective, or maximum drawdown objective, of 20% can be set which is the maximum that

one would be prepared to “give back” to the market when managing a portfolio over the long-term.

This is a boundary within which an investor might wish to remain, knowing full well that to generate

returns to meet long term goals risk needs to be taken. Otherwise capital should be left in the bank

to endure eternal drawdown from growing capital at a lesser rate than inflation.

What a realistic risk to be taken is for any given investing strategy is drawn from research of that

strategy against historical data. This information can be found in the SPA3ETF Reference Manual.

To ensure that a portfolio of capital doesn’t exceed the set Risk Objective, an investor may employ a

‘shut-off valve’ when a portfolio reaches a certain level, say 15% drawdown, or ¾ of the Risk

Objective, at which time all positions could be moved to cash until a new entry signal occurs in any

one of the ETFs being followed.

Reward Objective

Investors require a target, an investing goal to aim at. When it comes to financial markets it is very

different to setting a static goal such as a salary level goal which is mostly in the control of the

individual. Whilst the investing individual has control over a few things, the majority of the variables

at play in the financial markets are well out of the control of any single investor or group of

investors. That’s the risk.

However, in the executing arena of the financial markets it is very possible to control the risks while

achieving a level of return that will provide feedback to the investor as to how well they are doing.

That is, to compare their investing returns over the long term to market benchmarks.

Market benchmarks tell us what potential return has been available over a given period and

we need to know how much of that potential we have been able to capture or to exceed.

The accepted worldwide benchmark for stock market investment is the S&P500 index. If one was to

invest in mutual funds in the United States then this would be the benchmark against which the

majority of fund managers would be measured and held accountable.

In any given six month period, or selected measurement period, there will be other equity indices

around the world, such as the Brazilian, German, Australian, NASDAQ or Mexican indices, that

outperform the S&P500 but this will not occur in every period. Indeed, there are equity indices

around the world that are far more volatile than the S&P500 index and over, say 15 to 20 or so

years, had an investor had the foresight to know this and the mental fortitude to remain the course

on a more volatile ride with such indices, their returns could have been far higher than the returns

offered by the S&P500 index.

SPA3ETF provides the opportunity to have limited exposure to such indices, when best to be in

them, and potentially boost returns without taking any more, in fact taking less, risk than buying and

holding a “low cost S&P500 index fund”, as Warren Buffett describes them.


One of the main aims of SPA3ETF is to outperform the financial industry accepted benchmark, and

hence the investing professionals, the fund managers, and to do so while spending as little as 20 or

so minutes a week managing an allocation of capital.

In the May 2016 Version of SPA3ETF a number of large cap strong trending stocks were added to the

SPA3ETF methodology to further improve the probability of achieving excellent outperformance.

The accepted benchmark against which to measure individual portfolio performance is the S&P500.

The Minimum Reward Objective is to outperform the S&P500 by a minimum of 4% CAGR, excluding

dividends and leverage, over a rolling five year period. (CAGR = Compounded Annual Growth

Return).

An additional 4% CAGR will result in doubling one’s returns over 17.5 years of investing, excluding

dividends, from what otherwise would have been achieved without the additional 4% CAGR! That’s

all it takes to do more than twice as well as more than 80% of the mutual funds.

Most of the few that do better than you probably would have been closed funds to a small number

of high net worth investors that you would never have been able to get access to anyway.

With dividends included, about 2.5% CAGR can be added for the S&P500 index and around 3.8% for

the ASX200 index, over the long term.

With leverage the 4% CAGR outperformance can be increased quite substantially. This is covered

later in the Manual.

Use the ‘rule of 70’ to calculate the time to double the return of an index. Simply divide the

outperformance CAGR, e.g. 4% in the above discussion, into 70. For example, 70÷4 = 17.5 years, or

70÷7.8 = 9 years.

Basis for the Reward Objective

To put the above Reward Objective into perspective the following is quoted verbatim from the bi-

annual SPIVA® US ScoreCard Report from September 2014 that is published by:

“The U.S. domestic equity markets finished the 12-month period ending June 30, 2014, on

a positive note. The S&P 500®, S&P MidCap 400® and S&P SmallCap 600® returned 24.61%,

25.24% and 25.54%, respectively. However, the results show that over this period most active

domestic equity funds failed to achieve returns above their respective benchmark. With the

exception of managers of multi-cap value funds and real estate funds, the majority of

managers across all other categories underperformed the benchmark. According to the data,

59.78% of large-cap managers, 57.84% of mid-cap managers and 72.79% of small-cap

managers underperformed their benchmarks.


The past five years have been marked by the rare combination of a remarkable rebound in

domestic equity markets and a low-volatility equity environment. This combination has

proven to be difficult for domestic equity managers, as over 70% of them across all

capitalization and style categories failed to deliver returns higher than their

respective benchmarks.

Similarly, the past 12 months have not been favorable for international equity managers. The

majority of managers across all categories saw their returns lag behind the benchmarks.

Approximately 70% of global equity funds, 75% of international equity funds, 81% of

international small-cap funds and 65% of emerging market funds underperformed their

benchmarks

Funds disappear at a meaningful rate. Over the past five years, nearly 25% of domestic

equity funds, 24% of global/international equity funds and 17% of fixed income funds have

been merged or liquidated. This finding highlights the importance of addressing survivorship

bias in mutual fund analysis. “

This information is freely available on the S&P Dow Jones Indices website for USA, European and

Australian funds’ performance compared to their respective benchmark indices. A summary page is

included in Table 1 for the US and Table 2 for the ASX markets from the latest SPIVA Scorecards as at

time of publishing this Manual.

Table 1


Table 2

Share Wealth Systems has been following these reports for many years and every report shows that

around ¾, or mostly more, of fund managers underperform their respective benchmarks and with

additional research S&P Dow Jones Indices has ascertained that over the years it is not the same ¼ of

funds that do outperform each year, such that over a ten year period there may be only a handful of

managed funds that outperform their benchmark Total Return (Accumulation) indices, if any. See

their Persistence Reports for this research.

It is a very low probability that any investor would find and invest in any of these handful of mutual

funds in advance, meaning that there is a high probability that the investor placing their capital with

an active mutual fund manager would not even match, let alone outperform, the S&P500 or

equivalent benchmark index.

These bi-annual reports can be researched by any investor. To confirm the point and show that this

has been happening for many years the following is a verbatim extraction from the June 2008

SPIVA® US ScoreCard Report:

“Over five years ending June 2008, S&P 500 outperformed 68.6% of actively managed

large cap funds, S&P MidCap 400 outperformed 75.9% of mid cap funds and S&P

SmallCap 600 outperformed 77.8% of small cap funds.

Among global equity funds, five-year results show S&P Global 1200 outperforming 70.1% of

global equity funds, S&P 700 outperforming 86.5% of international equity funds, and S&P

IFCI Composite outperforming 73.9% of emerging market funds.

Funds disappear at a meaningful rate. Over five years, 26.8% of U.S. equity funds, 22.5% of

global equity funds and 24.7% of fixed income funds have been merged or liquidated.”

Looking at every bi-annual SPIVA® ScoreCard Report back to this time, spanning well over a decade,

shows similar rolling five year and twelve month index underperformance and disappearance by

mutual and managed funds the world over.

The SPIVA® US ScoreCard Report measures mutual funds’ performance against the Total Return

indices in the United States and Accumulation indices in Australia.

This information is profound for the DIY investor in two ways:


1. The majority of active mutual funds struggle to beat their respective benchmarks and hence

puts the relatively huge fees that mum-and-dad investors pay them into question, fees that

continue to scale higher in absolute value based on Funds under Management (FuM) and

the total of which continue to compound negatively against the investors’ capital year after

year.

2. Trying to find a mutual fund in which to invest that even matches the benchmark let alone

outperforms it is going to be a very low probability exercise, and even if a small minority do

outperform, it is not the same mutual funds every year or rolling five years.

Why and how active mutual fund managers struggle to outperform their respective indices is

documented in a number of books but especially in books by Charles Ellis and John Bogle and in

particular the latter’s book “The Little Book of Common Sense Investing”.

In his book John Bogle and his team found over a 25 year period from 1980 to 2005 that the majority

of active mutual funds in the United States could not beat the S&P500 index, not the S&P500 Total

Return index. Their findings also showed that mutual fund investors did even worse than the mutual

fund managers through making mistakes in switching between various mutual funds driven by

chasing performance into funds just as the performance slowed in the funds that they chased.

Quoting from page 44 of John Bogle’s book: “During the quarter century from 1980 to 2005, the

return on the stock market (measured by the S&P500 Total Return Index) averaged 12.5 percent per

year. The return of the average mutual fund averaged just 10.0 percent.”

This means that mutual funds averaged the return of S&P500 index excluding dividends even though

they obviously receive dividends, i.e. they could not match the S&P500 Total Return Index, falling

2.5% below, on average.

Research conducted by Share Wealth Systems over the last 15 or so years shows that the average

returns of managed funds in Australia roughly matches that of the All Ordinaries index over rolling

three and five years and hence lags the All Ordinaries Accumulation index by around 3.8% CAGR.

The importance of SPA3ETF is that every investor now has the potential to achieve far better returns

than the so-called investing pro’s, using ETFs, without expending much time in doing so. Certainly far

far less time that it will take to:

research tens of stocks in which to invest (how long does it take to learn fundamental and/or

technical analysis?),

research which mutual funds in which to invest, or

meet and continuously correspond with and measure an investment adviser who will decide

on your behalf how to invest your money.

The essence of what SPA3ETF and the research documented in the SPA3ETF Manuals is all about

taking control of one’s own investments through deploying a simple efficient process that has been

stress tested and can fit into anyone’s lifestyle.


Summary

SPA3ETF has been designed to place the DIY investor amongst the upper echelon, or beyond, of

investing pro’s and thereby become your own better performing fund manager.

We commend SPA3ETF to you, the empowered DIY investor.


SPA3ETF Investment Approaches

There are a number of approaches that can be used to execute SPA3ETF from only ever having a

single open ETF position to having multiple open ETF positions in different asset classes.

The SPA3ETF Portfolio Manager, implemented in SPA3 TradeMaster, will assist in managing

whichever approach is used by an investor.

For ETF strategies where calculated position sizing is straightforward such as 1 or a few unleveraged

positions, requiring an elementary understanding of mathematics, an investor could manage their

positions with only a modern mobile phone. These strategies would be managed via our SPA3ETF

alerts delivered in the complimentary Share Wealth Systems alerts smartphone / tablet app

(available on iTunes and Google Play).

The overriding approach that SPA3ETF utilises is one of mechanical trend-following momentum

timing combined, in some instances, with relative strength to determine in which ETF(s) and / or

large cap stocks to take a position.

Which of the approaches detailed below, or combination thereof, one decides to use can be

determined by a combination of the following criteria:

Time availability,

Investment capital available,

Where the investor is placed in their investing lifetime: early, mid or late,

Tolerance for Risk, meaning combination of Risk Objective and Reward Objective that meets

an investor’s requirements and investing personality.

Introduction

The philosophy and researched approach behind SPA3ETF, which is demonstrated via the research

results in the SPA3ETF Reference Manual as a result of the rigorous research that has been poured

into the methodology, is as follows:

Aim to achieve investing returns in line with or in excess of Warren Buffett’s Berkshire

Hathaway (NYSE stock code BRK.A) over the long term.

o This is an average of around 12.5% compounded per annum over 20 years since Q4

1994, excluding dividends (BRK.A has never paid dividend).

Do so with lower drawdowns than were experienced by BRK.A of 49% (1998 – 2000) & 52%

(2007 – 2009), and closer to maximum drawdowns of 15% - 20% in any large bear market.

Warren Buffett’s strategy, at a big picture perspective, is to invest in low volatility long term

viable stocks that generate lots of cash-flow, are low capital intensive companies and then to

leverage this portfolio of stocks at a ratio of around 1.6 to 1. (Source: “Buffett’s Alpha”).

SPA3ETF’s philosophy is to emulate this approach by investing in equities indices, via ETFs,

which by default have far lower volatility than individual stocks, and then re-invest dividends

and, if appropriate to the investor, to leverage these ETFs at a similar ratio of 1.6 to 1, or a

different ratio depending on the investors risk appetite and active investing fortitude for

tolerating drawdowns.


In addition SPA3ETF also provides the option of including a focused few high profile large

cap strong trending stocks to assist in boosting returns.

So is this possible? Let’s illustrate.

The graph below shows the following indices based to the same starting point as at 5th March 1996:

Blue = BRK.A, Berkshire Hathaway.

Black = $SML, the S&P600 Small Cap index.

Gold = $SPXEW, the S&P500 Equal Weighted index.

Magenta = $SPXTR, the S&P500 Total Return index, which is the S&P500 including dividends.

Note that the $SPXEW without dividends has outperformed the $SPX with dividends.

What this shows is that Warren Buffett’s BRK.A has performed roughly the same as the S&P600

Small Cap index since March 1996. Remember that it has been researched and documented that

Warren Buffett leverages his portfolio by around 1.6 to 1 (Source: “Buffett’s Alpha”). However, the

$SML is not leveraged in Figure 1. The $MID, the S&P400 Mid Cap Index, provides similar long term

results to the $SML.

Figure 1

Therefore if, over time, one is able to construct a simple strategy that is able to outperform the

$SML, whilst not experiencing the extent of the drawdowns that the $SML, BRK.A and other world

equity indices experience from time to time, then one’s stock market investment performance will

be up there with one the world’s best ever investors, and certainly way better than the great

majority of so-called investing pro’s, the mutual fund managers.

Sure, there have been some divergences between BRK.A and $SML over periods here and there. But

for any investor to be successful they do need to:


understand and accept that both positive and negative divergences will occur between their

equity curve, regardless of strategy, and the benchmark index,

achieve big picture perspective and therefore ride out the divergences,

understand and accept at all times what the objectives of their strategy are,

have credible evidence that their strategy has and can continue to work as intended and

hence trust it to be able to execute it with confidence over a large sample of trades and

years.

This is what SPA3ETF has been designed to achieve.

The SPA3ETF Relative Strength Strategy achieves this by following rising trends in a focused small

number of hand-selected world equity indices and ensuring that most of the time one’s capital is in

the relatively strongest of those indices at any given time and when all those indices are declining,

within a medium term horizon, all of one’s capital is in cash.

And take no longer to manage the SPA3ETF Relative Strength (RS) Strategy than it takes watch a half-

hour episode of a TV Show once per week.

SPA3ETF simplest approach, single index ETF

The simplest approach with which to utilise SPA3ETF would be to merely invest in and time a single

index ETF and re-invest all dividends. And maybe apply some leverage. The results of this approach

are shown in detail in the SPA3ETF Reference Manual.

This would involve following the SPA3ETF signals for a single index such as the S&P500, S&P400 or

ASX200 and simply re-invest all the dividends into purchasing more of the ETF whenever a dividend

is paid.

Just following this approach would provide performance that outperforms at least 82% of active

mutual funds in the United States over 10 years, as shown in Table 1, and 75% of active managed

funds in Australia over 5 years, as shown in Table 2 on the previous pages.

This simple efficient strategy has merit in its own right and should be seriously considered for

extremely time-poor investors that want to achieve far better returns than funds of all kinds, viz.,

401K plan providers, active mutual funds, Super Funds (industry, corporate and retail) and active

managed funds in Australia.

SPA3ETF Relative Strength (RS) Strategy

The simplest strategy, being the strategy that requires the least time and even least capital, involves

focussing on just a few, say, five world equity index ETFs. The world equity indices may be:

1. A large cap USA equities index such as the S&P500, Dow Jones Industrial Average or Wilshire

5000.

2. Another large cap USA equities index, such as the NASDAQ 100 or Composite, or a mid-cap

equities index, such as the S&P400.

3. A small cap USA equities index such as the S&P600 or Russell 2000.

4. An international emerging markets equities index such as the Mexican Bolsa index.

5. Another international emerging markets equities index such as the Brazilian Bovespa index.


This strategy requires that the capital apportioned to this strategy is as near as possible to 100%

invested in any one of the five ETFs at any given time, or 100% in cash, as determined by the

imperfect mechanical timing rules of SPA3ETF.

By ‘imperfect’ it is meant that exits will not occur precisely at market tops and entries will not occur

precisely at market bottoms, but the probabilities are extremely high that a large bear market will be

totally avoided.

The five indices are equities market orientated with a spread of mainstream equities indices and

more volatile emerging markets indices.

At first glance this strategy and the ETF categories that are recommended may feel like a fairly high

risk strategy for some investors compared to what may feel ‘normal’ and compared to the other ETF

approaches provided below. However, there is a high probability that it may also provide high

returns over the long term while also providing excellent protection against a large bear market

compared to many other investing strategies such as buy & hold of an active mutual fund(s), buy &

hold of a stock portfolio or buy & hold of a single ETF.

To put this statement into perspective this means that drawdowns should be less than any single

equity index might experience, in fact less than individual blue-chip stocks, stock portfolios and Total

Return / Accumulation indices might experience, but achieve growth in excess of most large cap

stock portfolios without needing to have to pick which stocks to be in and out of on an ongoing

basis.

For example, many so-called blue chips on the NYSE and NASDAQ in 2008 fell by large percentages,

such as Berkshire Hathaway (-52%), Bank of America (-94%), American Express (-84%)! Some stocks

were delisted and all capital invested in such stocks was lost! This was just 6 years after a worse bear

market on the NASDAQ where the index fell by -76% and NASDAQ listed stocks by far more! In

Australia, CBA (Commonwealth Bank), one the bluest of blue-chip stocks on the ASX, experienced

a -60% fall during the 2008 bear market as did other banking stocks around the globe. REITs around

the world fell by more, some over -90%.

The point being that large outperformance of an index can be achieved by simply being in cash

during a large bear market and by being in the strongest index when the stock market rises strongly.

SPA3ETF Equal Weighting Strategy

A variation to the SPA3ETF RS Strategy is to invest in all, say, five ETF’s simultaneously when they are

open trades and to be in cash when any one of the five is a closed trade.

This will require that investors’ capital be broken into five allotments with each allotment to be kept

at an equal percentage of the portfolio capital for each of the five ETFs when any one is an open

trade. An allotment will be in cash if the particular ETF allotted to that portion of capital is a closed

trade.

Whether an index ETF is an ‘open’ or ‘closed’ trade is determined by SPA3ETF timing.

Research shows that the drawdown using this variation is lower than the SPA3ETF RS Strategy but

the exposure to the market over time is lower so returns are far less but still way ahead of what the


S&P500 index and the majority of active mutual funds can achieve, as determined by their

underperforming the S&P500 index as discussed in the introduction of this manual.

Of course the allotment need not be equal at 20% of capital to each ETF. An investor may decide to,

say, apportion 22.5% to two of the ETFs and 15% to the other three to create a weighting towards

more or less volatility.

Or of course 3, 4, 6 or more ETFs can be used for the strategy.

SPA3ETF RS Strategy with Leverage

In this variation the investor executes exactly the same approach as detailed in the SPA3ETF RS

Strategy but utilises leverage to boost returns. The underlying philosophy of SPA3ETF is to utilise

timing to:

reduce the potential of large down swings in an investor’s portfolio equity curve that could

be caused by one or a few individual stocks or by the overall market having a large decline,

and then

to leverage the rising periods to boost returns but keep drawdown within acceptable limits.

Leveraging portfolios of individual stocks can definitely boost returns by more than leveraging

equities indices (i.e. ETFs) but undoubtedly causes far greater drawdowns that most individual

investors may not be able to handle psychologically. SPA3ETF provides the option to only use index

ETFs and /or to use the additional growth potential of a few high profile large cap strong trending

stocks.

The leverage that has been researched in this Manual is based on the same reported leverage factor

that Warren Buffet uses of 1.6 : 1.

Leverage can be achieved by using Reg–T Margin in a USA brokerage account or through CFDs in

Australia and most European countries through broker-dealers such as Saxo Bank and IG Markets.

Also, mini Warrants and Instalment Warrants can be considered, or Margin Lending through a

mainstream broker-dealer.

SPA3ETF Equal Weighting Strategy with Leverage

This is the SPA3ETF Equal Weighting Strategy discussed above with 1.6 to 1 leverage.

Each of the equally weighted positions is leveraged at 1.6 : 1 and remains at that absolute leveraged

position size until all positions have been closed due to an exit signal occurring. When a new entry

signal next occurs the new leveraged position is calculated at the same leverage factor of 1:6 : 1.

This can work because there will always be times when all positions are closed allowing the process

of re-leveraging realised profits. I’m sure that you can see the compounding advantages compared

to leveraging a position that is never closed. The latter would only ever get leveraged once and

never again. Unless some form of timing is used to leverage open profits, but when would this be

done if no timing mechanism is used?

Also, drawdowns would also be fully leveraged thereby exacerbating drawdown.


SPA3ETF Sector Strategies

In this variation the GICS Select Sector ETFs, or SPDRs, comprise the universe of ETFs on which the

investor focuses, viz., XLB, XLE, XLF, XLI, XLK, XLP, XLU, XLV, XLY. The iShares IBB Biotechnology and

IYR Real Estate ETFs can be added to this list too.

The philosophy behind focussing on just the sectors is that at any given time at least one sector will

be relatively stronger than the overall market index when the overall market is rising and hence

outperforming the overall market. This undoubtedly happens as investment capital moves in cycles

between different industries.

Just a single ETF of the nine, or ten, can be invested in at any given time, as in the SPA3ETF RS

Strategy. Or the top two, or even three, as determined by the Relative Strength rules that an

investor may choose to use.

For example, to provide ideas, an investor may choose the top two SPDR ETFs using Relative

Strength and remain invested in these until either one drops below 5th place (or 3rd place, say) using

Relative Strength. At this time capital is switched from the falling ETF into one that now holds a

position in the top two.

These ideas have not yet been researched but would be simple to implement using the SPA3ETF

Ranking feature in Beyond Charts. As well, you could implement these via the Ranking screen in the

Share Wealth Systems alerts app.

SPA3ETF MYO Strategies

This variation allows the investor to Make Your Own (MYO) list of ETFs from the market indices and

the Select Sector ETFs. It is suggested that no more than 10 ETFs are selected in the list as the

strategy becomes more active the more ETFs there are in your MYO ETF list.

Either a Relative Strength approach can be used or an equal weighting approach, or both, and with

or without leverage.

There are a myriad of combinations that could be used. Not every combination can be researched in

advance by Share Wealth Systems.

More complex ETF and Stocks strategies

Such strategies break an investor’s investing capital into different portions of capital that would be

allocated to different asset classes selected from large cap equities indices, small to mid-cap equities

indices, industry sectors, domestic equities indices, international equities indices, commodities, real

estate and bonds.

Capital could be invested in up to, say, five or six different asset classes. The fewer asset classes the

less effort that will be required to manage a portfolio of ETFs and the less complexity in selecting the

universe of ETFs from which to operate. SPA3ETF Timing for Stocks can be used to include some or

all of the stocks supported by SPA3ETF timing.

It should be recognised that the one and only reason for splitting capital into different asset classes

is to manage risk during adverse market conditions, while still taking some risk to achieve investing


gains. Without stating the obvious, to minimise one’s risk, one or two of the asset classes should aim

at investing in lower volatility instruments such as bonds and cash, or defensive sectors such as

consumer staple, utility or health industry sectors.

However, there is another way to minimise risk. It is suggested that market timing be used to

achieve the necessary risk management objectives, that is, to exit the market as each ETF signals an

exit signal and go into cash when SPA3ETF’s timing suggests so.

If an investor’s risk profile is one that is comfortable with market timing and one’s capital investment

into a SPA3ETF strategy is small relative to their overall investment capital then it may not be

necessary at all to consider more complex higher effort diversification ETF strategies.

It is acknowledged that investors that would entertain such strategies could fit into any one of the

following categories:

more mature investors that are well into their retirement and hence have a low tolerance

for risk,

those with an investment base that would be allocated to an ETF investing solution of at

least $1.0M but probably more,

those that are risk averse and simply cannot tolerate much drawdown psychologically or

otherwise.

Even though diversification across asset classes is associated with risk minimisation, a set of market

circumstances can always evolve whereby drawdown could be far larger than would ordinarily be

expected from a well-diversified portfolio, thereby ‘diworsifying’ ones outcomes.

Such circumstances were evident in 2008 when equities, real estate and most bonds, although to a

lesser extent, all declined in value. That is why timing is potentially a much better risk management

strategy than diversification.


Executing SPA3ETF with a single index ETF

This section almost doesn’t require explanation as it is so simple to execute. But it has been included

for completeness sake.

This is the simplest method with which to use SPA3ETF. It might be selected as a method by time

poor investors or those just starting out with a small amount of capital that want to do better than

active mutual funds or those that don’t wish to merely leave their money in the bank while they

learn the art of investing.

Process

Select a single ETF on which to focus. This would typically be a large cap index and could be the

S&P500 SPY ETF, the S&P500 Equal Weight RSP ETF, the NASDAQ100 QQQ, the S&P400 Mid Cap IJH

ETF, the ASX200 STW, ASX50 SFY, or any other. It could even be a sector index or a more volatile

emerging markets index.

1. When an entry signal occurs for the selected ETF simply purchase ETF units with all the

capital allocated to the strategy.

2. The ‘open trade’ ETF should be analysed daily for an exit signal. The Share Wealth Systems

Alerts smartphone app can be used to monitor the ‘open trade’ for an exit signal.

3. When an exit signal occurs then the entire holding should be sold.

4. If a dividend distribution occurs while an ETF is an ‘open trade’ then the dividend should be

added to the portfolio and more units purchased immediately if the ETF trade is still open at

dividend payment time, i.e. all dividends are re-invested to maximise growth, just as active

mutual fund managers do.

Simulation outcomes for using this strategy are provided in the SPA3ETF Reference Manual.

Of course, if this strategy is being used for managing an IRA, 401(k) or SMSF then regular

contributions should be added to the trading account and invested when the next entry signal

occurs for the ETF.

Ensure that the lowest possible brokerage rate is achieved. In the United States some ETFs can be

bought and sold commission-free such as iShares IJH with TD Ameritrade, Fidelity and Firstrade, and

iShares IVV with Fidelity, E*Trade and Firstrade.


Executing the SPA3ETF Relative Strength Strategy

This section provides an overview of the process, from analysis to execution, of SPA3ETF’s Relative

Strength (RS) Strategy.

Process

An ‘open trade’ ETF is one where the last signal displayed on the chart is a SPA3ETF entry signal and,

hence, the exit signal is yet to occur. A ‘closed trade’ ETF is one where the last SPA3ETF signal was an

exit signal.

The, say, five ETFs should be included in a Beyond Charts Watch List for daily analysis. The process is

as follows:

1. When there are no ‘open trades’ in any of the ETFs, each of the five ETFs should be analysed

on a daily basis for an entry signal.

2. If an entry signal occurs in more than one ETF, then open a position in the ETF with the

highest Relative Strength (RS) – see the next section below ‘Analysing Relative Strength’ for

this process.

o The SPA3ETF Ranking feature in Beyond Charts as well as the Share Wealth Systems

app will assist in this process.

The app can be downloaded by searching the Apple App Store or Google

Play for Android devices for “Share Wealth Systems”.

3. All cash allotted to this portfolio is allocated to that single ETF ‘open trade’.

4. The ‘open trade’ ETF should be analysed daily for an exit signal and on Friday’s for a higher

RS ETF that is also an open trade.

o The SPA3ETF Ranking feature in Beyond Charts as well as the Share Wealth Systems

app will assist in this process.

The app can be downloaded by searching the Apple App Store or Google

Play for Android devices for “Share Wealth Systems”.

5. If an exit signal occurs in the ‘open trade’ ETF, the trade should be closed on the following

trading day, using either a (Market on Close) MOC or MOO (Market on Open) order, if

available.

o Another position must be opened in one of the other four ETFs.

o The ETF must be an existing ‘open trade’, must be the ETF with the highest RS on

that day and its current Low must be greater than the previous Swing trough Low.

The SPA3ETF Ranking feature in Beyond Charts as well as the Share Wealth

Systems app will assist in this process by showing a Valid or Not Valid Swing

Chart position.

6. If all five ETFs are ‘closed trades’ according to SPA3ETF momentum trend following rules

then all capital allotted to the portfolio will be in cash.

7. If a dividend distribution occurs while an ETF is an open trade then the dividend should be





Swapping from an ‘open trade’ ETF, i.e. when an exit signal has not yet occurred, to another ETF only

occurs on a Monday after analysing the RS for all ETFs where an exit signal has not occurred, using

Friday’s daily close data, i.e. RS analysis is only required to be conducted on a weekly basis (usually

the weekend) while a current ETF trade is open and more than one of the five ETFs are ‘open trades’.

Research Note: Daily analysis and potentially swapping on a daily basis, rather that weekly, based on

a higher RS added only a tiny bit more profit for far more effort. Other days of the week for weekly

analysis were also researched and Friday produced the better results but all days were still fairly

close to conducting RS analysis on Fridays.


Analysing Relative Strength

In the early versions of SPA3ETF the Relative Strength analysis needs to be conducted manually in

Beyond Charts. Whilst this will always be able to be done, since May 2016 a Relative Strength

Ranking feature was added to Beyond Charts.

This ranking feature is replicated in the Share Wealth Systems alerts app that was released later on

in 2016.

The manual method involves setting up a Rate of Change (ROC) indicator with a 126 day period. 126

trading days is around 6 months. The setup and configuration has been done for you and can be

found in the Overlays side panel, expanding SPA3ETF Ranking group (via the ‘+’ icon) and double

clicking on the F3 SPA3ETF Ranking option.

F3 in this Overlay panel refers to F3 on a typical Windows keyboard for future use. You will see a

chart similar to Figure 2 once it has been applied.

Figure 2 – SPA3 Relative Strength Indicators displayed on Chart

Once the overlay is applied all that is required is to Page Down through a Watch List containing all

five ETFs and note the highest ROC 126 value.

If the ETF that has the highest ROC % has a new Low (not Close) that is lower than the last swing

trough using a 3 day Swing Chart then do NOT do a swap into that ETF. Either:

swap into the next highest ROC % whose current Low price is greater than the last 3 day Swing trough,

remain with the currently open ETF if it is still an open trade. If none of the ETFs are an open SPA3ETF trade then the portfolio should be 100% in cash.


For example, in Figure 2.1 of XLE ‘today’s Low’ is below the most recent swing trough.

Figure 2.1 – Example of daily low below most recent Swing Trough

This process is conducted every Friday and whenever a new trade from one of the five ETFs is

required.

The SPA3ETF Ranking feature has been programmed to ensure that the highest ranked ETF in the

scan is a ‘valid’ open trade with its current daily low price being greater than the last trough low

price. Valid and Not Valid charts are intentionally separated to reduce the possibility of accidently

entering an ETF with a not valid Swing Chart position.



Executing the SPA3 Equal Weighting Strategy

This section provides an overview of the process, from analysis to execution, of SPA3ETF’s Equal

Weighting Strategy.

Process

The five, or more, ETFs should be included in a Beyond Charts Watch List for daily analysis.

Divide the cash allocated to this strategy by the number of simultaneous open positions that will be

managed. For example, if four open positions then 25% of capital to each ETF, if five then 20%, if 6

then 16.6% to each position etc.

An ‘open trade’ ETF is one where the last signal displayed on the chart is a SPA3ETF entry signal and,

hence, the exit signal is yet to occur. A ‘closed trade’ ETF is one where the last SPA3ETF signal was an

exit signal.

The process is as follows:

1. When there are no ‘open trades’ in any of the ETFs, each ETF should be analysed on a daily

basis for an entry signal.

o The SPA3ETF Ranking feature in Beyond Charts and the Share Wealth Systems app

will assist in this process.

2. If an entry signal occurs for an ETF, then open a position for each ETF that provides an entry

signal. Use either a (Market on Close) MOC or MOO (Market on Open) order for USA ETFs. It

is suggested that a Market order placed before the market opens is used for the ASX.

3. Allocate the equal portion of the portfolio that is allocated to each ETF.

4. ‘Open trade’ ETFs should be analysed daily for an exit signal.

o Status screen in the Share Wealth System alerts app is the quickest way to do this

when fully invested, where all 5 positions are open.

5. If an exit signal occurs in an ‘open trade’ ETF, the trade should be closed on the following

trading day, using either a (Market on Close) MOC or MOO (Market on Open) order for USA

ETFs, or a Market order placed before the market opens for the ASX.

6. If all ETFs are ‘closed trades’ according to SPA3ETF momentum trend following rules then all

capital allotted to the portfolio should be in cash.

7. If a dividend distribution occurs while an ETF is an open trade then the dividend should be






SPA3ETF Performance Summary

This section provides a summary of the detailed research that is provided in the SPA3ETF Reference

Manual.

The tables that follow summarise the research results that are detailed in the SPA3ETF Reference

Manual. Each column aligns with a set of research results for a particular Strategy and mix of ETFs

for that Strategy with each performance metric provided in the respective rows for that Strategy.

Each set of research results are those of an historical portfolio simulation using SPA3ETF timing

rules.

The first table, Table 3, of summarised research results compares trading SPA3ETF, with and without

leverage, on just a single ETF, the PowerShares QQQ ETF (NASDAQ 100 Index $NDX), to buying and

holding Berkshire Hathaway (BRK.A), $NDX via QQQ and the S&P500 via the SPY ETF.

The main benchmark being the $SPX/SPY Buy & Hold tells investors what the potential for returns,

excluding dividends, has been over the given period. That is, 2.21% CAGR (Compounded Annual

Growth Return).

Using SPA3ETF to trade the QQQ would have returned 8.78% CAGR, or 6.57% CAGR better than the

S&P500, excluding dividends for both, with a far lower Max Drawdown % for SPA3ETF of -27.42%

vs -56.3% for the S&P500 index.

Whilst investing in Berkshire Hathaway is beyond most investors due to the price of a single share

being over $200,000 at time of writing, its relative performance is provided in Table 3 due to the

reference in this Manual to it being a benchmark for a successful approach to at least match on an

ongoing basis.


Table 3 - Summarised research results for varying investing strategies

Two starting dates are used for the research in this manual: 19th June 2000 and 30th April, 2003. The

reason for this is that two ETFs that feature heavily in SPA3ETF research, IJR (ETF for $SP600) and

RSP (ETF for $SPXEW) were listed in June 2000 and end of April, 2003, respectively.

Each set of performance results is discussed in more detail in the SPA3ETF Reference Manual.

However, some important metrics are highlighted for comparison in this summary section:

Annual Gain %, or CAGR (Compounded Annual Growth Return),

Max Drawdown %,

Sharpe Ratio,

Number of Trades over 14.5 years.

A detailed discussion could be held as to whether the Sharpe Ratio is the best metric to use to

compare one strategy, or approach, to another. This is not the place for that discussion except to

Strategy $NDX/QQQ QQQ ETF QQQ ETF $SPX/SPY BRK.A

Buy and

with Lev Buy and Buy and

Research Results Hold SPA3ETF SPA3ETF Hold Hold

Starting Date 19-Jun-00 19-Jun-00 19-Jun-00 19-Jun-00 19-Jun-00

Ending Date 05-Nov-14 05-Nov-14 05-Nov-14 05-Nov-14 05-Nov-14

Starting Capital $100,000 $100,000 $100,000 $100,000 $100,000

Ending Capital $103,618 $335,252 $502,767 $136,849 $367,844 Annual Gain % (CAGR) 0.25% 8.78% 11.89% 2.21% 9.48%

Exposure 100.00% 66.84% 106.30% 100.00% 100.00%

Number of Trades 1 22 22 1 1

Avg Profit/Loss % 3.60% 6.91% 6.91% 36.95% 278.37%

Avg Bars Held 3,618 108.95 108.95 3,618 3,618

Winning Trades 1 14 14 1 1

Winning % 100.00% 63.64% 63.64% 100.00% 100.00%

Avg Profit % 3.60% 14.15% 13.84% 36.95% 278.37%

Avg Bars Held 3,618 136.29 143.5 3,618 3,618

Max Consecutive 1 4 6 1 1

Losing Trades 0 8 8 0 0

Losing % 0.00% 36.36% 36.36% 0.00% 0.00%

Avg Loss % 0.00% -5.23% -5.23% 0.00% 0.00%

Avg Bars Held 0 48.50 48.5 0 0

Max Consecutive 0 3 3 0 0

Max Drawdown % -80.79% -27.42% -42.34% -56.33% -50.72% Max Drawdown % Date 9/10/2002 30/10/2001 30/10/2001 9/03/2009 5/03/2009

Sharpe Ratio 0.1564 0.6863 0.5857 0.2167 0.6468

Expectancy 0 1.3202 1.3215 0 0

This table excludes dividends. BRK.A does not pay dividends.


state that it is included here because so many research papers and books published by others use

the Sharpe Ratio as a measurement of risk adjusted returns. Readers of this manual can therefore

use the Sharpe Ratio as an objective measurement of the risk adjusted returns of SPA3ETF to other

strategies.

The Sharpe Ratio is also relevant to the ‘buy and hold’ strategy and hence is an important

measurement of the risk adjusted return for a benchmark over a given period against which to

compare SPA3ETF research results. The higher the Sharpe Ratio the better.

Performance Summary of 4 x ETF Mixes for the RS Strategy

Four different ETF mixes of five ETFs each have been simulated to show the variation in performance

that can be achieved depending on how the ETFs selected perform, and in relation to how well their

price characteristics match the mechanical timing rules of SPA3ETF. The four different mixes for the

RS Strategy, in order, are:

Including the more volatile international ETFs from April 2003: EWW, EWZ, QQQ, RSP, SLYG;

“ETF Mix 1”.

Excluding the more volatile international ETFs from April 2003: EWG, IJR, IWM, QQQ, SPY;

“ETF Mix 2”.

Including the more volatile ETFs, from June 2000: EWW, EWZ, IJR, QQQ, SPY; “ETF Mix 3”.

Including the lesser volatile ETF, from June 2000: EWW, EWG, IJR, IWM, QQQ; “ETF Mix 4”.

The next table, Table 4, compares two different sets of five ETFs over the period 30th April 2003 to

5th November 2014. Both sets use the SPA3ETF RS Strategy where a single ETF is invested in at any

given time based on momentum and Relative Strength. Dividends are excluded.

The first set includes two of the more volatile international index ETFs available, viz. EWW and EWZ,

and the other, “ETF Mix 2”, excludes these two volatile international index ETFs.

The research results of the SPA3ETF RS Strategy for “ETF Mix 1” are simply staggering, at 25.06%

CAGR, showing that market timing based on researched trend-following momentum concepts

combined with another simple technical analysis called Relative Strength can work brilliantly,

provided trends occur, which they did indeed in the two volatile ETFs, EWZ and EWW.

“ETF Mix 2” contains less volatile ETFs that didn’t trend as well as those in “ETF Mix 1” which is why

they have been included and researched as part of this Manual.


Table 4 – SPA3ETF RS research with various ETF mixes vs SPY Buy and Hold

Note that the lower return set of five ETFs, “ETF Mix 2”, managed to return 4% CAGR better than the

$SPX/SPY buy and hold. Importantly this is the Reward Objective of SPA3ETF discussed in ‘Reward

Objective’ section at the start of this Manual.

Of course, this research does show what would have been possible in hindsight with the various sets

of ETFs and their respective price movements over the research period. Past returns do not

guarantee future performance however, researching a system over varying price characteristics is

what tests robustness, reliability and a higher probability of achieving similar performance in the

future.

Table 5 shows another two sets of five ETFs that we called “ETF Mix 3” and “ETF Mix 4”. Neither of

these sets of ETFs contains RSP so the historical portfolio simulations begin on 19th June 2000. Both

sets use the SPA3ETF RS Strategy where a single ETF is invested in at any given time based on

momentum and Relative Strength.

Strategy $SPX/SPY SPA3ETF RS SPA3ETF RS

Buy and Strategy Strategy

Research Results Hold ETF Mix 1 ETF Mix 2

Starting Date 30-Apr-03 30-Apr-03 30-Apr-03

Ending Date 05-Nov-14 05-Nov-14 05-Nov-14

Starting Capital $100,000 $100,000 $100,000

Ending Capital $220,765 $1,313,714 $336,456

Annual Gain % (CAGR) 7.12% 25.06% 11.11%

Exposure 100.00% 78.59% 80.19%

Number of Trades 1 103 104

Avg Profit/Loss % 120.78% 2.91% 1.41%

Avg Bars Held 2,901 23.17 23.12

Winning Trades 1 63 61

Winning % 100.00% 61.17% 58.65%

Avg Profit % 120.78% 6.47% 4.72%

Avg Bars Held 2,901 28.24 28.87

Max Consecutive 1 8 6

Losing Trades 0 40 43

Losing % 0.00% 38.83% 41.35%

Avg Loss % 0.00% -2.68% -3.29%

Avg Bars Held 0 15.18 14.95


Max Drawdown % -56.47% -19.39% -32.61%

Max Drawdown % Date 9/03/2009 17/09/2008 20/03/2009

Sharpe Ratio 0.503 1.1741 0.8035

Expectancy 0 1.0884 0.4276

This table excludes dividends.


Table 5 - SPA3ETF RS research with different various ETF mixes vs SPY & QQQ Buy and Hold

Over this research period both sets of five ETFs outperform the S&P500 by 9.2% CAGR and nearly

11% CAGR, respectively, excluding dividends. The notable difference between the $SPX/SPY Buy &

Hold results in Tables 4 and 5 is that two bear markets occurred in the research period covered in

Table 5.

Table 6 summarises the Equal Weighting Strategy of SPA3ETF for “ETF Mix 1”, with and without

leverage from 30th April 2003. The CAGR, Sharpe Ratio and Max Drawdown % are all excellent for

both of these simulations given the potential on offer as shown by the $SPX/SPY buy and hold

performance over this period.

Strategy $SPX/SPY SPA3ETF RS SPA3ETF RS $NDX/QQQ

Buy and Strategy Strategy Buy and

Research Results Hold ETF Mix 3 ETF Mix 4 Hold

Starting Date 19-Jun-00 19-Jun-00 19-Jun-00 19-Jun-00

Ending Date 05-Nov-14 05-Nov-14 05-Nov-14 05-Nov-14

Starting Capital $100,000 $100,000 $100,000 $100,000

Ending Capital $136,849 $594,270 $472,885 $103,618

Annual Gain % (CAGR) 2.21% 13.19% 11.41% 0.25%

Exposure 100.00% 79.18% 80.49% 101.37%

Number of Trades 1 106 128 1

Avg Profit/Loss % 36.95% 2.03% 1.48% 3.60%

Avg Bars Held 3,618 27.97 23.48 3,618

Winning Trades 1 60 69 1

Winning % 100.00% 56.60% 53.91% 100.00%

Avg Profit % 36.95% 6.26% 5.74% 3.60%

Avg Bars Held 3,618 34.1 27.65 3,618

Max Consecutive 1 6 5 1

Losing Trades 0 46 59 0

Losing % 0.00% 43.40% 46.09% 0.00%

Avg Loss % 0.00% -3.48% -3.50% 0.00%

Avg Bars Held 0 19.98 18.61 0


Max Drawdown % -56.33% -32.64% -37.00% -80.79%

Max Drawdown % Date 9/03/2009 11/03/2003 20/03/2009 9/10/2002

Sharpe Ratio 0.2167 0.7795 0.6804 0.1564

Expectancy 0 0.585 0.4225 0



Table 6 – ETF Mix 1 Equal Weighting Strategy with and without Leverage

Table 7 shows the Equal Weighting Strategy of SPA3ETF for “ETF Mix 1”, and “ETF Mix 4” with and

without leverage from 19th June 2000.

Again, CAGR, Sharpe Ratio and Max Drawdown % are all excellent for both of these simulations

given the potential on offer as shown by the $SPX/SPY buy and hold performance over this period.

Strategy $SPX/SPY Equal Weight Equal Weight

Buy and ETF Mix 1 ETF Mix 1

Research Results Hold with Lev

Starting Date 30-Apr-03 30-Apr-03 30-Apr-03

Ending Date 05-Nov-14 05-Nov-14 05-Nov-14

Starting Capital $100,000 $100,000 $100,000

Ending Capital $220,765 $463,327 $944,764

Annual Gain % (CAGR) 7.12% 14.24% 21.53%

Exposure 100.00% 66.40% 104.82%

Number of Trades 1 118 118

Avg Profit/Loss % 120.78% 7.65% 7.65%

Avg Bars Held 2,901 83.64 83.64

Winning Trades 1 72 72

Winning % 100.00% 61.02% 61.02%

Avg Profit % 120.78% 15.08% 15.08%

Avg Bars Held 2,901 111.4 111.4


Losing Trades 0 46 46

Losing % 0.00% 38.14% 38.98%

Avg Loss % 0.00% -3.98% -3.98%

Avg Bars Held 0 40.17 40.17


Max Drawdown % -56.47% -16.12% -25.54%

Max Drawdown % Date9/03/2009 25/11/2011 25/11/2011

Sharpe Ratio 0.503 1.1609 1.0862

Expectancy 0 1.9234 1.9234



Table 7 - ETF Mix 1 & 4 Equal Weighting Strategy with ETF Mix 4 Leverage

All of the results summarised in these tables are discussed in detail in the SPA3ETF Reference

Manual, complete with equity curves and drawdown underwater graphs in some instances.

Summary

For most investors the Equal Weighting Strategy, either with or without leverage, depending on

tolerance for drawdown, might be the preferred strategy.

For those with lesser amounts of capital perhaps the SPA3ETF RS Strategy might appeal more.

Strategy $SPX/SPY Equal Weight Equal Weight Equal Weight

Buy and ETF Mix 1 ETF Mix 4 ETF Mix 4

Research Results Hold with Lev

Starting Date 19-Jun-00 19-Jun-00 19-Jun-00 19-Jun-00

Ending Date 05-Nov-14 05-Nov-14 05-Nov-14 05-Nov-14

Starting Capital $100,000 $100,000 $100,000 $100,000

Ending Capital $136,849 $505,377 $385,432 $649,991

Annual Gain % (CAGR) 2.21% 11.93% 9.84% 13.90%

Exposure 100.00% 64.13% 66.93% 104.87%

Number of Trades 1 137 144 144

Avg Profit/Loss % 36.95% 7.10% 5.67% 5.67%

Avg Bars Held 3,618 80.81 82.4 82.40

Winning Trades 1 81 81 80

Winning % 100.00% 59.12% 56.25% 56.74%

Avg Profit % 36.95% 15.44% 13.59% 13.59%

Avg Bars Held 3,618 109.58 112.89 112.89


Losing Trades 0 56 63 61

Losing % 0.00% 40.88% 43.75% 43.26%

Avg Loss % 0.00% -4.96% -4.52% -4.52%

Avg Bars Held 0 39.2 43.21 43.21


Max Drawdown % -56.33% -16.12% -18.88% -29.71%

Max Drawdown % Date9/03/2009 25/11/2011 30/10/2001 30/10/2001

Sharpe Ratio 0.2167 1.0022 0.815 0.729

Expectancy 0 1.4338 1.256 1.256



How does SPA3ETF compare to SPA3 ASX & SPA3 NASDAQ?

SPA3 ASX and SPA3 NASDAQ are equities based methodologies. They manage portfolios of between

10 – 25 stock positions per portfolio, depending on portfolio size and position size.

Over time SPA3 ASX and/or SPA3 NASDAQ should outperform any of the SPA3ETF strategies by quite

a large margin. This is because holding a portfolio of multiple open stock positions has the ability to

vary far more, both up and down, than an index or a sector. This is due to far more volatility in each

individual stock position compared to the volatility of an equities index or sector.

Having said this, the SPA3ETF RS Strategy ‘ETF Mix 1’ certainly performed extremely well. This did

include stellar periods of trending by the Mexican Bolsa index and the Brazilian Bovespa index, the

latter bolstered even more by a strengthening Brazilian Real currency against the US dollar that

caused the EWZ ETF to rise by more than the actual spot index.

However, performance is not the only criterion that investors look at when deciding what strategy to

use.

Other criteria include but are not limited to:

Time to execute the strategy including analysis and trade execution.

Investing capital available.

Tolerance for risk which includes equity curve volatility and potential maximum drawdown.

Access to other markets, such as international exchanges, sectors and commodities.

Investing off shore or not and if so, currency risk that comes with investing off shore.

Broker0dealer used and access to stock exchanges and instruments.

Over the long term, five to ten years, SPA3ETF should outperform Accumulation and Total Return

Indices by around 1% - 4% CAGR (annualised % return), depending on ETF mix and market

conditions, which is better than nearly all fund managers around the world.

Over the long term, five to ten years, SPA3ETF should outperform spot indices, i.e. excluding

dividends, by an even larger margin of around an additional 2.5% CAGR, depending on ETF mix and

market conditions, that is, 3.5% - 6.5% CAGR. This is because Total Return indices in the United

States outperform their spot indices by around 2.5% compounded per annum.

SPA3 can do far better than this but can do worse over periods of time, depending on market

conditions. Simulations show that the median SPA3 ASX and SPA3 NASDAQ portfolio equity curve

perform far better than simulated SPA3ETF equity curves.

The big difference between the two is that SPA3 will execute over 10x more trades than SPA3ETF

and hence will require far more time to execute.

SPA3 for equities, including trade execution takes about 15 mins – 20 mins a day depending on

whether using MOC orders on the NASDAQ or Limit orders on the ASX. SPA3ETF shouldn’t take more

than 20 mins a week to follow and execute.


SPA3ETF will also sustain far larger portfolios of multiple millions of dollars whereas SPA3 for

equities will start running into liquidity problems in the high 100’s of 1000’s or just over a $1.0M,

again depending on market conditions.

SPA3ETF will allow access to invest in international market indices, emerging market indices and

commodities.

SPA3ETF, utilising a much lower volatility instrument in an ETF, lends itself to leverage with lesser

potential drawdowns than leveraged stock portfolios. Investors may be open to leveraging an ETF

strategy that could boost returns to more closely match SPA3 ASX or NASDAQ unleveraged

portfolios. However, SPA3 ASX or NASDAQ can also be leveraged to boost returns.

SPA3ETF and SPA3 ASX/NASDAQ are not mutually exclusive strategies and hence can be used

alongside each other to diversify across strategies with different investing objectives.

A Core Satellite Investing Approach can be used to invest with both strategies and products. The

Core Satellite Approach is discussed in more detail in the Share Wealth Systems Education Centre

and in eUGM recordings in the Members Zone on 27th November 2015 and 25th February 2016.

These two eUGM recordings can be accessed here. You will need your Customer ID to log in.

http://www.sharewealthsystems.com/members-zone/eugms/


SPA3ETF Indicators

There are a number of technical analysis criteria and rules that determine when an ETF should be an

‘open trade’, when it should be closed and when a higher RS ETF should be swapped to. The rules

are unambiguous and mechanical and are programmed into Beyond Charts so that the investor does

not need to determine the technical analysis criteria and rules manually on a day to day basis.

SPA3ETF uses three technical analysis techniques:

1. Swing charts with a three day, or two day in some cases, period setting.

2. A SPA3ETF customised ATR Trailing Stop specifically for low volatility (compared to stocks)

index price action.

3. Base 100 Relative Strength which determines strength over a specified look-back period.

The Swing Charts used by SPA3ETF look similar to percent based zig-zag charts but are not. The

swing is determined by a new low or new high being achieved over the selected period. For example,

for a 7 day swing peak to be achieved requires that a new low occur from the last high that is lower

than the lowest low over the last 7 trading days.

The Swing Charts are used to determine exits that can occur before an ATR Trailing Stop exit occurs.

Patterns are programmed into SPA3ETF to determine an exit. These patterns are:

an Initial Stop Loss (ISL) based on the first trough after entry being violated (ISL_TS, Initial

Stop Loss Trailing Stop),

a lower swing peak followed by a lower swing trough (LPLT, Lower Peak Lower Trough),

a swing peak forming lower than the entry signal bar (FLP, First Lower Peak),

a precisely defined Head & Shoulders (H&S, Head & Shoulders), and

a lower low than the last four swing troughs (4LT_TS, 4 Lower Troughs Trailing Stop).

Whilst these exit patterns are used for most ETFs, not all patterns are used for all ETFs. This has been

determined through research.

ATR = Average True Range, which measures the range of a trading day from High to Low but also

includes gaps from one trading day to the next if one exists. It is a measure of price volatility. This

can then be averaged over a number of trading days. 21 days is used for SPA3ETF. Other periods

ranging from 13 to 30 were researched and 21 decided upon for the investment horizon in which

SPA3ETF operates.

The ATR Trailing Stop is a fairly standard indicator that is used quite widely across the technical

analysis fraternity. What makes the application of this indicator in SPA3ETF unique are the multiples

that are used for each volatility zone and for each index / ETF. SPA3ETF applies different multiples to

different levels of volatility.

The research into the use of Swing Charts and the ATR Trailing Stop has been conducted by Share

Wealth Systems to discover a unique combination for indices, sectors, commodities and their

respective ETFs based on the displayed characteristics in their historical price movement and

volatility.


The SPY (S&P500 ETF) chart below shows how SPA3ETF handled a really messy period during 2010 –

2012. Whilst there were two loss trades, one was cut short. The choppiness in September 2011 was

avoided and three decent trends were captured over this period.

Figure 3 – SPA3ETF SPY from 2010 to 2012

Base 100 Relative Strength is then used in one of the SPA3ETF strategies to determine which ETF, if

multiple are ‘open trades’, is the stronger over a researched and predetermined Base 100 look-back

period. This technique is used to determine which ETF, from a few, to open a positon into and

whether or not to swap between multiple open ETF trades on a weekly basis.

A further technical analysis technique is used to ensure that an ETF is not swapped into that is an

open trade, has a higher RS but is currently in a short-term down trend. This is discussed in the

section ‘Analysing Relative Strength’ earlier in this manual.

Example of how the ATR_TS is displayed

In Figure 3.1, on the day before the SPA3ETF signal occurs, Tuesday 15th March 2011, the Close for

the SPY is $128.56 (use Right Click, Value Line to get this value, as displayed in Figure 3.1) is above

the ATR_TS indicator at 127.625 so the indicator line (red in Figure 3.1) remains below the SPY price

to show that this remains an open trade.

On the following trading day, 16th March 2011, the value of the ATR_TS would have been 127.625

because the ATR_TS indicator cannot go lower, only higher, when there is an open long trade.

On 16th March 2011, the SPY Closed at $126.18 which is less than the ATR_TS of 127.625. This is an

exit so the ATR_TS recalculates and does a Stop & Reverse (SAR) and displays the ATR_TS line above

the SPY price.


Figure 3.1 – Display of the ATR_TS Indicator on a chart

Under no circumstances should the ATR_TS be used as an intraday stop to be acted upon if the

intraday price falls below the ATR_TS value, as it is the Close price that is used to determine whether

a signal has occurred on not.

To illustrate this, at bottom left in Figure 3.1, in August 2010, the Low price was lower than the

ATR_TS intraday on three occasions but the Close price was above the ATR_TS so the trade remained

open. This occurs more often that one would think.

The same applies for an ATR_BO for an entry signal, do not use the ATR_BO as an intraday stop entry

for an ETF.

Type of data required for SPA3ETF indicators

Both the Swing Charts and ATR Trailing Stop work far better on data where a High, Low and Close

prices are present because the High and Low prices are a necessary part of the ATR and Swing Chart

calculations.

The chart below shows data on the left where only the Close price is available (i.e. Open, High, Low,

Close are all recorded as the same price), and on the right where the Open, High, Low and Close

prices are available.


Figure 4

The Swing Chart uses High prices for determining a peak and Low prices for determining a trough.

The ATR Trailing Stop uses the Average True Range, which uses both the High and Low prices in

determining the ATR.

The following chart shows the same period for the same data where the Swing Chart and ATR

Trailing Stop are overlayed.

The left part of the chart shows that without the Highs and Lows, how much closer the ATR Trailing

Stop tracks the price action and much less volatile the peaks and troughs are. This doesn’t invalidate

the Swing Chart and ATR Trailing Stop concepts but it does increase the frequency of signals.

Figure 5


Relative Strength indicator

After much research of different Relative Strength indicators and parameters the final selection of

which to use was one of the simplest methods of determining Relative Strength, a Rate of Change

indicator, sometimes also called a Momentum indicator.

The Rate of Change (ROC) indicator simply measures the percentage change in price from a starting

point x trading days ago to the current trading day.

For example, in Figure 6 the 21 day ROC, the middle graph, is 0.369, which means that price has

risen 0.369% over the last 21 trading days. And the 63 day ROC, the bottom graph, is -1.365 meaning

that price has fallen -1.365% over the 63 trading days.

Figure 6

A Base 100 indicator merely measures percentage change in price from a common starting date

which is exactly what the ROC does except it uses a lookback period. So the ROC indicator has been

used to achieve exactly the same as what a rolling 6 month Base 100 Relative Strength indicator

would achieve.

Because SPA3ETF focuses on ETFs that track mainstream indices, there is no missing data (because

indices ‘trade’ every day) and hence a lookback period can be used instead of a starting date.

The lookback period that is used for SPA3ETF is 126, which is around 6 months. Period settings of 21,

42, 63, 100, 126, 252 and weighted combinations of 3 to 6 of periods mentioned were researched.

The shorter periods provided the worse results. It was decided to use the 126 day lookback period

for SPA3ETF Relative Strength.


SPA3ETF in Beyond Charts

SPA3ETF signals and indicators are only available on a select number of ETFs, stocks and indices in

Beyond Charts. Over time more ETFs and stocks will be included in the list of ETFs supported by

SPA3ETF.

These will be determined in the main by low tracking errors of the ETFs to the major indices and

sectors with a reasonable amount of historical data.

The reason for this is that each ETF and index is researched by Share Wealth Systems to determine if

there are any idiosyncrasies or characteristics that are particular to an individual index, sector,

commodity or ETF. This should be done because there is a limited universe of ETFs with sufficient

data, volume and minimal tracking error that qualify to be used in SPA3ETF.

It is not the intention of SPA3ETF to analyse boutique ETFs that do not track a mainstream index.

The Swing Charts and ATR Trailing Stop can be displayed on the charts of the available ETFs and

stocks in SPA3ETF, as are entry and exit signals.

SPA3ETF will initially use SPA3 TradeMaster as a Portfolio Manager for SPA3ETF where a portfolio

equity curve can be displayed and compared against an index benchmark of choice, such as the

S&P500. A portfolio’s statistics can also be viewed. SPA3 TradeMaster will be replaced by a new

Portfolio Manager in due course that will be tightly integrated into Beyond Charts.

SPA3ETF Watch Lists

The latest list of ETFs and stocks supported by SPA3ETF is automatically generated and maintained in

Beyond Charts. Updates will be automatically released when they are available through Beyond

Charts providing an updated list. Note that this process is separate from your daily data downloads

via the Data Downloader tool.

You can find the two Watch Lists through the Watch List Explorer panel on the left hand side of

Beyond Charts+, as shown in Figure 7.

The two Watch Lists will always be called:

SWS ETFs for SPA3ETF

SWS Stocks for SPA3ETF

Please contact [email protected] if the Watch Lists are not available in your Watch

List Manager and you are licensed for SPA3ETF.

Only ETFs and Stocks for the stock exchange that a user is subscribed to - U.S data and/or ASX data –

will be included in each of these Watch Lists.

mailto:[email protected]


Figure 7

These Watch Lists can be used with the SPA3ETF Ranking feature, to Scan for SPA3ETF entry signals

or to make a sub-list Watch List from which to use one of the SPA3ETF strategies. These Watch Lists

are also the ‘official’ researched SPA3ETF Watch Lists on which SPA3ETF signals are supported.

Turning SPA3ETF On / Off

The SPA3ETF icon is found on the CHART Tab in the Beyond Charts, as shown in Figure 8. SPA3ETF

signals are displayed on a SPA3ETF supported ETF or stock when the SPA3ETF icon, highlighted by

the royal blue arrow in Figure 8, is ‘turned on’.


Figure 8

If the SPA3ETF icon is not displayed then your instance of Beyond Charts is not licenced for SPA3ETF,

or, if it is licenced, then there is an error and you should contact Share Wealth System for support at

[email protected] .

Scanning with SPA3ETF

A SPA3ETF list of ETFs or stocks can be scanned for entry and exit signals using the Beyond Charts

Scanning engine. This is achieved from the Scans panel on the right side of the Beyond Charts screen.

To open the Scans panel, either move the mouse cursor across to the right side of the screen and

select Scans, or, when a chart is open, right click and select “Side Panels” then select “Scans”.

Figure 10

A default Scan Profile is provided with SPA3ETF with the System set as ‘SPA3ETF’. Users of SPA3 ASX

or SPA3 NASDAQ will also be able to select ‘SPA3’ as a System in a dropdown menu below SPA3ETF.

There are no parameters for the System ‘SPA3ETF’ on the Parameters panel.

To complete setting up the Scan, select the Securities Tab and ensure that a SPA3ETF Watch List is

selected from the Watch List Explorer.

The provided list can be selected by dragging either or both of the ‘SWS ETFs for SPA3ETF’ or ‘SWS

Stocks for SPA3ETF’ Watch Lists from the Industry Watch List window in the Watch List Explorer over

from the left side panel of Beyond Charts into any of the 3 boxes under the Securities Tab. Your

Watch Lists box, the bottom of the 3, should appear similar to Figure 11.

mailto:[email protected]


Figure 11

The Settings tab allows the user to set different kinds a scans and for different timeframes.

Once the Scan is set up, simply click on the Scan button as shown by the blue arrow in either of

Figures 10 or 11.

SPA3ETF Ranking Feature

A core difference to the other ETF scan types is that the Ranking scan returns a row for each security

in the ETF Watch List being scanned so that the validity of each signal (using whether a security is

Open/Closed, has a valid/not valid Swing Chart position, and the value of the ROC (usually 126 day

period) can be accessed. If there are buy or sell signals on the day being scanned these are also

shown.


To set up a Ranking scan go to the Scans Tab, create a new SPA3ETF Profile, on Securities add the

required ETFs (or a Watch List) and on Settings select the scan type of Ranking.

Complete the setting parameters as shown below to scan with the researched SPA3ETF parameters:

The settings tab contains:

Chart Options – F3, this includes a Swing Chart overlay and the relative strength indicator on the

chart. This will automatically adapt to the chosen values in Settings.

Indicator

Type - Rate of Change (Cannot be edited).

Period – Set to recommended 126 days but can be varied if desired.

Decimal – number of places Rate Of Change data appears in datasheet

Valid Signals Only – this returns only rows of data that have an open action and valid Swing

Chart position (i.e. ignores closed and invalid positions) if ticked.

Signal – It will always scans for both entry and exit signals (Cannot be edited).


Time Frame:

Last Trade Period returns data from the last day’s data. Unlike other ETF scans, the ranking

scan returns the status of all stocks/ETFs in the attached watch list.

Period – determines how many day’s data will be returned

Period Type – day scans over a number of days, week scans over a number of weeks.

Once the scan has finished, when a signal occurs on the day being scanned, it will appear in the

“Signal” column together with Signal Date and Signal Price. Action Price and Date only appear if

scanning for more days than only the Last Traded day, as shown below.

The Ranking value in the scan results is the Rate of Change value, so the highest Ranking value is the

best eligible Relative Strength trade, assuming the Action is OPEN and the Swing Chart Position is

VALID.

Setting up a ROC 126 Overlay in Beyond Charts

Set up the ROC 126 and 3 day Swing Chart indicators for any ETF, as shown in the chart for MDY in

Figure 12.

Figure 12

As of July 2016, this has been included in Beyond Charts for you, taking a lot of the setup work out of

your hands. This Overlay can be used with any chart in the future and these indicators will be

displayed for that chart.


You can find this overlay in the Overlay panel on the right hand side (Right Click a Chart -> Side

Panels -> Overlays) under the ‘SPA3ETF Ranking’ Group associated with the F3 key slot.


SPA3ETF Portfolio Manager

Creating a New Portfolio

The SPA3ETF Portfolio Manager functionality is provided via SPA3 TradeMaster. The position sizing

for SPA3ETF is very simple.

Essentially a portfolio will contain just a single ETF/stock or it will contain 2 to n ETFs/stocks of

equally weighted position sizes. This makes the establishment and ongoing management of a

portfolio within SPA3 TradeMaster very simple.

The first step in to complete the General -> Portfolio screen as shown in The “New Portfolio Profile”

screenshot below. For System select ‘SPA3ETF’. At this stage a SPA3ETF portfolio can either contain

ASX ETFs/stocks or USA ETFs/stocks but not both ASX and USA instruments in a single portfolio.

General -> Beyond Charts requires a portfolio name to be entered. This will create a portfolio Watch

List within Beyond Charts from which ETFs in the portfolio can be charted.

The Money Management screen is very simple. Merely enter the number of open ETF or stock

positions that will be managed in this portfolio and SPA3 TradeMaster will calculate the correct

position size.


The last section, Costs, allows the user to enter their brokerage default rates that will be calculated

for the Buy Screen.

Injecting Cash

This is done in the same way that cash is injected for any portfolio in SPA3 TradeMaster:

Adjustments -> New -> Injection.

Leveraged Position sizing for SPA3ETF RS Strategy Portfolio

Currently SPA3 TradeMaster does not support leverage for SPA3ETF. An example is provided below

on how to use leverage of 1.6 : 1 using a Reg-T margin account in the U.S. or CFDs in Australia (CFDs

are not available in the U.S.) with the SPA3ETF Relative Strength Strategy.

To achieve the correct leveraged position sizing, US$50,000 was injected into SPA3 TradeMaster.

To calculate the leveraged position size for a new position, multiply the Portfolio Value by 1.6 when

there are no open positions.

E.g. $50,000 * 1.6 = $80,000. Divide the ETF/stock price into $80,000 and round down to get the

Quantity. The Trade Value must be less than the maximum leveraged position size of $80,000.


The following message will appear when the transaction is committed. Select [Yes].

Assume the position is closed at a 2.19% loss, as per the following screenshot.


The Portfolio Value will now be $48,250.52.


To calculate the next position size multiply the current Portfolio Value by 1.6, e.g., $48,250.52 * 1.6 =

$77,200.83 then divide the close price of the ETF/stock into $77,200.83 less the anticipated

commission to open the next position.

In reality the Portfolio Value after closing a position will need to be estimated using the previous

day’s close.

Starting the SPA3ETF RS Strategy Portfolio

Being a Relative Strength method, to initially start the portfolio and enter a positon in the market,

this strategy does not need to wait for an entry signal to occur if at least one of the ETFs on your

chosen ETF and/or stocks list in is an open trade.

However, the more conservative and prudent approach is that the SPA3ETF RS Strategy is started

when there are NO ‘open trades’ in any of the ETFs/stocks on your chosen list, or it is started when

the NEXT ETF/stock on your chosen list signals and entry and only ETFs/stocks that provide an entry

signal after that date are considered in the RS Strategy.

Leveraged Position sizing for a SPA3ETF Equal Weighting Portfolio

Currently SPA3 TradeMaster does not support leverage for SPA3ETF. An example is provided below

on how to use leverage of 1.6 : 1 using CFDs with the SPA3ETF Equal Weighting Strategy.

To achieve the correct leveraged position sizing, ‘margin’ has to be calculated manually until SPA3

TradeMaster supports leverage.

US$60,000 was injected into SPA3 TradeMaster.

To calculate a single leveraged position size for a new position, multiply one sixth of the Portfolio

Value as if there are no open positions by 1.6.

E.g. $60,000 * 1.6 = $96,000. Divide $96,000 by 6 to calculate the leveraged position size for each of

the equally sized positions = $16,000.

Divide the ETF price into $16,000 and round down to get the Quantity. The Trade Value must be less

than the maximum leveraged position size of $16,000, including commissions.

When there are multiple open positions navigate to the Open Trades screen: Portfolio -> Open

Trades – Current. The Profit $ should be subtracted from the Portfolio Value in the screenshot

below to calculate the ‘margin’.

Multiply the ‘margin’ by 1.6 and divide by the number of positions that the Equal Weighting portfolio

should have. In this portfolio it is 6.

In the screenshot below, the position size for a new trade would be $69,057.34 - $9,735.82 =

$59,321.52 * 1.6 = $95,914.43 / 6 = $15,819.07.


Click on Portfolio -> Current Status and ensure that the Invested: box is always less than 160%.


Starting a SPA3ETF Equal Weighting Portfolio

There are two ways that a new SPA3ETF Equal Weighting portfolio can be started:

1. Each position in the portfolio can be opened when a new SPA3ETF entry signal occurs for

each selected ETF/stock.

2. To open positions in all of the selected ETFs/stocks that are open trades at the time that the

portfolio is started.

The future is unknown so depending what happens in the ensuing weeks after starting the portfolio

will determine which the better option is. There is no way of knowing for sure in advance.

Investors may wish to choose either provided it is documented in their Investment Plan, however,

the more conservative and prudent approach would probably be option 1 above and to open each

equal weighting position when the next entry signal occurs for each ETF/stock in your chosen

ETF/stock list.

Being a publicly traded portfolio by Share Wealth Systems this portfolio should never miss entry

signals but investors’ portfolios may miss entry signals due to the investor not being involved with

investing at the time that they occur. Therefore one of the two options should be decided in

advance and documented in their Trading Plan.

Entering a New Buy transaction

This can be achieved in two ways:

1. By right clicking on a SPA3ETF signal on a chart in Beyond Charts and clicking on Act on

Signal (or double clicking on the signal in a chart) and then in SPA3 TradeMaster selecting

Act On -> SPA3 Signal.

2. In SPA3 TradeMaster, selecting Transactions -> New Buy.

A screenshot as such as shown below will be displayed if option 1 is used or a blank screen where

each field will need to completed by the user.


Entering a Sell Transaction

Like a Buy Transaction a Sell Transaction can be achieved in two ways:

1. By right clicking on a SPA3ETF signal on a chart in Beyond Charts and clicking on Act on

Signal (or double clicking on the signal in a chart) and then in SPA3 TradeMaster selecting

Act On -> SPA3 Signal.

2. In SPA3 TradeMaster, selecting Transactions -> New Sell.


SPA3ETF in Share Wealth Systems App

The complimentary Share Wealth Systems app is a great way to track SPA3ETF positions for the time

poor or travelling investor. Single ETF strategies, Relative Strength and Equal Weighting can all be

executed through the app.

You can download the app to your tablet or smart phone via the Google Play store (Android devices)

or the iTunes store (Apple devices).

Please see the relevant sections on executing these strategies to understand the process of what to

do. The sections below will outline the purpose for each screen of the app.

Logging In

To log in to the app you need to be an active Share Wealth Systems customer. Enter your email that

you have nominated with us and your 6 digit Member ID.

You can elect for the app to remember these details so you will automatically log-in when you next

open the Share Wealth Systems app.

After logging in, you may be requested to allow notifications from the app, please select ALLOW in

these instances for the full benefit of the alerts application.

SPA3ETF Alerts

Daily alerts are sent out to users about signals in accordance to the data they are subscribed to

which is currently Australian data, USA data or both.


The alerts latest date is clearly identified as well as the most recent day (in the week prior) that a

signal has appeared.

You can them drill down to see the 5 most recent days of alerts and swipe to see the ASX or USA

information if you are subscribed to both.

The alerts clearly identify the action required as a BUY or SELL. There will be alerts appearing that

may not necessarily be relevant to your chosen SPA3ETF strategy, so be diligent in checking any new

alerts daily to find any relevant actions for you.


SPA3ETF Ranking

The Ranking screen, accessible via select the MENU icon in the top left corner of the screen,

assists users with the ranking based on SPA3ETF AUS or SPA3ETF USA.

The initial screen displays the date of the most recent data and a very brief summary of the status of

ETFs and Stocks for that data subscription.

Sells are highlighted with a red exclamation mark icon if any new sells have been signalled with the

most recent market data intake.

These sells feature prominently on the detailed Ranking breakdown until the end of the next trading

day.

ETFs and Stocks are ranked by their rank value, then by Open status followed by Swing Chart

Position and Valid position.


Please see the SPA3ETF indicators for more details on the criteria we assess the Relative Strength

strategy by earlier in this manual. Additionally, “Executing SPA3ETF Relative Strength” if desired

which is also earlier in this manual.

SPA3ETF Status

SPA3ETF Status is straight forward, it simply is there to inform the user if the ETF or Stock is in a BUY

or SELL and the date since the most recent change in status.

The initial status screen provides a basic outline of the day the data is up to, the number of open

ETFs and Stocks and the number of closed ETFs and Stocks per data subscription.

Within the data subscriptions, the ETFs and Stocks are split in to 2 groups in alphabetical order.


Suggested ETFs to use in the SPA3ETF RS Strategy

This section provides research detail on each strategy to assist investors in choosing which strategy

they might elect to use.

SPA3ETF RS Strategy

These two strategies involve focussing on just five world equity index ETFs. The world equity indices

and their respective recommended ETFs are:

1. A large cap USA equities index.

a. S&P500 Equal Weight Index, $SPXEW, with ETF RSP (10%, 25%).

b. Other large cap ETFs that could be considered in order of preference: IVV, (10%,

25%), VTI (10%, 25%), SPY (10%, 25%).

2. Another large cap USA equities index or a mid-cap equities index.

a. NASDAQ 100 Index, $NDX, with ETF QQQ (or QQQQ) (10%, 25%).

b. S&P400 Mid Cap Index, $MID with ETF IJH or MDY (10%, 25%). There are other ETFs

applicable to this index in order of preference: JKG (10%, 25%), IWR (100%, 25%),

IVOO (100%, 25%), VO (100%, 25%).

3. A small cap or mid cap USA equities index.

a. $SML S&P600 Small Cap Index with applicable ETFs: SLYG (100%, 25%). There are

other ETFs applicable to this index in order of preference: IJR (15%, 25%), JKJ (15%,

25%), SLY (100%, 25%), VIOO (100%, 25%), VB (100%, 25%).

b. Or, Russell 2000 Index, $RUT, with ETF IWM (15%, 25%). There is another ETF

associated with this index: VTWO (100%, 25%).

c. Or, S&P400 Mid Cap Index, $MID with ETF IJH or MDY (10%, 25%). There are other

ETFs applicable to this index in order of preference: JKG (10%, 25%), IWR (100%,

25%), IVOO (100%, 25%), VO (100%, 25%).

4. An international emerging markets equities index.

a. $MXX with ETF EWW (15%, 25%).

b. Or, $BVSP with ETF EWZ (25%, 25%) or $XIN0 China Large Cap ETF FXI (15%, 25%).

5. An international emerging markets equities index.

a. $BVSP with ETF EWZ (25%, 25%).

b. Other international ETFs that could be considered in order of preference: Germany

EWG (15%, 25%), Hang Seng EWH (10%, 25%), Japan EWJ (15%, 25%).

The percentages above in brackets show the margin requirements for Saxo Capital Markets and the

USA based MB Trading, respectively at the time of writing.

The five recommended ETFs are shown in bold. These selections are based on the combination of

the following:

Relatively low tracking error, that is, the ETF closely follows its underlying index. This is one

of the most important criteria used. This was measured using a Base Reference (or Base 100)

technical analysis technique and reviewing various ETF analysis websites. However,

exchange rate variation does need to be allowed for.

Volume, although for major indices this is not that big an issue for their ETFs.


Performance.

Lifespan of the ETF and hence length of historical data.

Margin, if one wishes to leverage their exposure, or to use leverage to invest less actual

cash.

The existence of High and Low prices that are different to the Close price to form valid peaks

and troughs which allow more accurate measurement of volatility.

Commission-free buy and selling of some of the ETFs with some broker-dealers such as IJH

and IVV.

At any given time, an investor’s capital will be invested in just one of the five ETFs or in cash. Which

one ETF is determined by the following criteria:

1. A given ETF is an ‘open trade’ based on SPA3ETF timing criteria, that is, the last alert signal

was a ‘buy’ signal and a ‘sell’ signal has not yet occurred.

2. The ETF that is outperforming the other four ETFs at any given time as determined by

SPA3ETF’s relative strength criteria.

The two main concepts used in SPA3ETF are:

Momentum based trend-following imperfect market timing, and

Relative strength.

By imperfect it is meant that exits will not occur precisely at market tops and entries will not occur

precisely at market bottoms. And sometimes loss trades will occur, in fact in around half the trades.

The main benefits of using these two concepts are:

1. There is a high probability that investment capital will not be invested in the market during

large market corrections and hence will greatly reduce financial drawdown and

psychological angst.

2. When there is more than one ETF that is an open trade, capital will be invested in the single

relatively strongest ETF, of the five, as determined by price movement.

3. This means that when using the SPA3ETF RS Strategy, investors’ capital will have a higher

exposure to the market over time than if a single ETF was being timed.

4. Higher volatility ETFs can be included in the five ETFs that an investor focuses on which can

deliver higher returns than the S&P500 when they are trending. When they are not trending

then the lower volatility ETFs can still deliver S&P500 index like returns or better because of

the timing and relative strength concepts used in the System.

The two higher volatility ETFs selected in the list of five recommended ETFs are EWW and EWZ, the

Mexican and Brazilian indices, respectively. In the research within the SPA3ETF Reference Manual,

SPA3ETF’s results of trading each of the five indices alone is provided as is the SPA3ETF RS Strategy’s

results.

Due to volatility of the Mexican and Brazilian indices it is acknowledged that some investors may be

uncomfortable with actively investing in these indices. However, the degree of discomfort should be

counter balanced by the risk management steps taken to exit and swap out of the indices if they

start declining.


It should be mentioned that SLYG has much lower volume than the other four recommended ETFs

but should be enough for portfolios of multiple 100’s of 1000’s of dollars. If a portfolio is larger than

this or the investor is not comfortable with the lower volume of SLYG then the next small cap ETF

should be traded, IJR, which has significantly higher volume than SLYG. Simulations with IJR in place

of SLYG are provided in the SPA3ETF Reference Manual.

The list of ETFs is continuously changing with new ETFs being added and some being dropped by

providers. It is the investor’s responsibility to periodically conduct a review of the ETF universe to

determine if this list of five could be modified. Share Wealth Systems will do this from time to time

using the criteria listed above.

Each one of the five recommended ETFs is discussed next.

Large Cap USA index

Of the following potential indices and their respective ETFs, the $SPXEW and its ETF, RSP, is

recommended:

DJI (Dow Jones Industrial Average): DIA;

$SPX (S&P500): SPY, IVV, VOO (only started in 2010);

$SPXEW (S&P500 Equal Weight): RSP;

$RUI (Russell 1000): IWB;

$W5000 (Wilshire 5000): VTI.

This is based on:

performance,

low tracking error, and

the fact that over time small cap stocks outperform large cap stocks and with more

weighting being given to the small cap stocks in the S&P500, the $SPXEW index should

perform better than the S&P500 index over time, but not at all times.

The $SPXEW is the equal weighted version of the same constituents that comprise the S&P500,

which is a market capitalisation weighted index. This means that in the $SPXEW index, stock number

500 in the S&P500 constituent list gets the same weighting as stock number 1, whereas in the

S&P500 stock number 500 would get a far smaller weighting based on its relative market

capitalisation to stock number 1 on the list.

This means that if smaller cap stocks’ share prices in the S&P500 list do better than their larger cap

peers then the $SPXEW will outperform the $SPX, and vice versa, as they will have more weighting

that they get in the standard S&P500 index.

It will also mean that the $SPXEW will tend to be slightly more volatile than the S&P500, volatility

that SPA3ETF is prepared to withstand based on the two concepts that underpin SPA3ETF, namely

momentum trend-following, meaning that there will be trailing stop exit signals, and relative

strength.


To illustrate relative performance between the indices, Figure 15 shows Base Ref performance

comparisons with prices based at 14th October, 2002 which was near the bottom of the 2002 bear

market.

Figure 15 – Index Base Reference Comparisons to S&P SmallCap 600 from 14th October 2002

The different indices depicted, as shown on the top left legend, in order of performance over the 12

years to November 2014, are:

$NDX - NASD100 index (green),

$SML – S&P600 Small Cap index (red),

$SPXEW – S&P500 Equal Weight index (blue),

$W5000 – Wilshire 5000 index (brown),

$SPX – S&P500 index (black).

Whilst, since 2002, performance has been in the order shown, in the lead up to the March 2000

market top the large cap indices did perform better than the small caps – note that the red ($SML)

and the blue ($SPXEW) lines were below the black ($SPX) and brown ($W5000) lines at the bottom

left of the chart.

Figure 16 shows the same indices but based as at 9th October 1995. This view strengthens the point

made about the S&P500 Equal Weight index, the role that the small caps play in its performance and

the performance of the $SML small cap index.


Figure 16 Index Base Reference Comparisons to S&P SmallCap 600 from 9th October 1995

Based on this data it makes sense that the $SPXEW is chosen as the large cap equities index and its

corresponding ETF, RSP, for SPA3ETF. The risk is that periods may occur in which the $SPXEW

underperforms the other indices mentioned. Other indices are included in the list and Relative

Strength is used to measure when these periods occur to partly mitigate this risk.

Importantly, an investor needs to know how closely the Guggenheim RSP ETF tracks the $SPXEW

index. The Base Ref is used once again to show this. Figure 17 is that of the RSP ETF with the $SPXEW

chart overlayed in blue, based as at 30th April, 2003, soon after the RSP ETF was listed.

Figure 17 – RSP tracking against $SPXEW referenced from 30th April 2003


This ETF has a very small tracking error and hence is an excellent ETF proxy for actively investing in

the $SPXEW index.

Another Large Cap USA index

Whilst it is widely thought that most large cap indices perform similarly, when one does the analysis

this is clearly not the case. Sure, the direction may have a high correlation but the amplitude not

necessarily so.

Reviewing the previously shown charts of the major indices it is obvious that the $NDX, or NASDAQ

100, has shown far more volatility and hence growth potential than the $SPXEW, $SPX, $W5000 and

$DJI. It has also had a massive fall that few investors would have been able to stomach and, if

experienced, may not have been able to continue investing thereafter. This is why timing using

simple trend following techniques is required, to ensure that such periods are spent on the sidelines

and in cash.

The NASDAQ Composite, $COMP, was considered for inclusion however it does not have an ETF that

tracks it. The PowerShares QQQ (or QQQQ) is the ETF that tracks the $NDX (Nasd100).

Figure 18 shows the PowerShares QQQ ETF (red & green bars) with $COMP (blue) and the $NDX

(black) overlayed using a Base Reference based from March 2000. The tracking error for the QQQ

compared to the $NDX is negligible.

Figure 18 – QQQ tracking against $NDX (black) and $COMP (blue) referenced from March 2000

The question begs, having seen the relative performance of the $NDX to other indices in the

previous charts, why not just time the $NDX? This is a relevant question the answer to which will

become clear in the research results contained within the SPA3ETF Reference Manual.

However, as a precursor to showing this research it should be stated here that it is an unknown for

how long the NASDAQ indices will continue to be more volatile than the other indices against which


it has been compared. Whilst there are no reasons at the moment that one can foresee to the

characteristics of the NASDAQ indices changing and becoming less volatile, their relative volatility

should still be reviewed from time to time by the long term investor. Again, this is a task that Share

Wealth Systems will conduct every now and then. However, if followed closely this should become

obvious to most investors.

Small Cap USA index

A number of small cap and mid cap indices and their respective ETFs were considered and

researched, including:

$SML (S&P600 Small Cap): IJR, SLY, JKJ, VIOO, VB, SLYG, SLYV;

$RUT (Russell 2000): IWM, VTWO;

$MID (S&P400 Mid Cap): MDY, IJH, IWR, JKG, IVOO, VO, RWK;

$RMC (Russell Mid Cap): IWR;

$RUMIC (Russell Micro Cap): IWC.

There are other international small cap indices such as Australia (ISO, SSO, VSO), Brazil (EWZS),

Germany (EWGS), Hong Kong (EWHS), Singapore (EWSS) and many others that at this time are

relatively new and hence lack volume and historical data for research purposes but may become

relevant in the future.

The $RUMIC is a relatively new index as is its ETF, IWC. This index/ETF may become more relevant in

the future.

Figure 19 shows the following indices against the State Street’s SLYG ETF bar chart (red & green):

$SML (blue), $RUT (black), $SMLTR – S&P600 Small Cap Total Return index (gold) and $MID

(magenta).

Figure 19 – SLYG Compared across various indices


This shows that the SLYG ETF outperforms the $SML, and hence $SML’s respective ETFs, and

performs roughly the same as the $SMLTR, the S&P600 Small Cap Total Return index, which includes

dividends. An investor in the SLYG ETF will receive dividends in addition to any price rises/falls if a

position is held as at an ex-dividend date and hence should outperform the $SMLTR index over the

long term.

As noted above, the volume traded in the SLYG ETF can be light. If this is a concern for larger

portfolios then the iShares IJR ETF can be used instead of SLYG. Figure 20 shows the $SML index

overlayed on the IJR ETF, based as at July 2000. There is hardly any tracking error at all and the daily

liquidity averaged over 3 months often exceeds $100M per day, as can be seen using the Liquidity

indicator in the bottom graph of Figure 20.

Figure 20 - $SML overlayed on the IJR ETF based referenced from July 2000

In seeking S&P500 outperformance and hence more risk managed volatility than the S&P500, other

proxies for a small cap index can be considered such as the NASDAQ Biotechnology sector index,

$IXBT, and it’s ETF, IBB.


Figure 21 – IBB to its Index $IXBT and Relative Performance to S&P500

Figure 21 shows the chart of the IBB ETF and the tiny tracking error to its underlying index, $IXBT, in

the top graph, and how well the index and its ETF have outperformed the S&P500 in the bottom

graph which is using RSC (Relative Strength Comparison) to show the outperformance.

International Emerging Markets index

A number of international indices and their respective ETFs were considered and researched,

including:

China: FXI, GXC, KBA;

Hong Kong: EWH;

Japan: EWJ, ITF;

Korea: EWY;

Mexico: EWW;

Brazil: EWZ;

Germany: EWG;

Switzerland: EWL;

Spain: EWP;

Taiwan: EWT

Italy: EWI;

Netherlands: EWN;

India: INP, INDA, INDY;

Singapore: EWS.

Based on the criteria stated earlier, but particularly lower tracking errors, more volatility and huge

volumes, Mexico and Brazil were selected. The German DAX, Japanese Nikkei, Hong Kong Hang Seng


and Chinese FTSE 50 ($XIN0) ETFs, viz. EWG, EWJ, EWH, FXI, respectively, are the only other

international ETFs that are included in SPA3ETF strategy research at this stage.

SPA3ETF users are free to choose their own mix from the researched and supported ETFs. Ensure

that volumes are checked for the emerging market ETFs.

Figure 22 is a Base Ref chart based as at 30th April 2003 showing the NASD100 (green), S&P600 Small

Cap index - $SML (brown), S&P500 Equal Weight index - $SPXEW (blue), Mexican index - $MXX

(magenta) and Brazilian Bovespa index - $BVSP (red).

Figure 22 – International indices compared to Brazillian Bovespa $BVSP from 30/04/2003

The ‘base date’ has been set at 30th April 2003 as this is close to the date that the RSP ETF was listed

whereas the other ETFs were all listed earlier than RSP. Therefore, our research that is detailed in

the Reference Manual and the respective simulations start at this date for this mix of ETFs.

Note how the relative strength of the Mexican and Brazilian indices were far stronger over periods of

the sample data period. This is the sort of relative strength that is being sort for the SPA3ETF RS

Strategy such that its strengths of trend-following and relative strength can be exploited to the full

to maximise gains whilst managing the risk of drawdown through exits and Relative Strength (RS)

swapping between ETFs.

Figure 23 shows the respective ETFs for the indices shown in the chart immediately above, all based

as at 30th April 2003.


Figure 23 – Indices respective ETFs compared from 30th April 2003

Figure 24 shows the Base Ref of the $BVSP and its iShares ETF, EWZ.

Figure 24

One’s immediate reaction to the big difference between the $BVSP and EWZ is that there is a large

tracking error due to the ETF provider not being able to follow the index closely. However, this is not

the case, the difference is due to exchange rate variation. Remember that the iShares ETFs are listed

on the ARCX in the United States and is denominated in US dollars. However the stocks that

comprise the $BVSP Bovespa index are traded in Brazilian Real.


Figure 25 shows the BRLUSD overlayed on the EWZ ETF. Note that the quoted and traded currency

pair is the USDBRL, with the USD the base and the BRL the quote, but the inverse BRLUSD is

overlayed in Figure 25 to simplify explanation.

In Figure 25, whenever the Brazilian Real is strengthening against the USD, i.e. the black line graph of

the BRLUSD is rising, the EWZ ETF, listed in USD, outperforms the $BVSP (blue line). And vice versa,

when the BRLUSD is falling the EWZ ETF underperforms the $BVSP.

Figure 25 EWZ compared to BRLUSD (black) and $BVSP (blue)

Importantly, this is why SPA3ETF analyses the ETF and not the underlying index. It would be

applicable to analyse the underlying index where both the ETF and the index are denominated in

USD, e.g. $SPX and SPY, $NDX and QQQ. However, this is still not recommended because there is still

not a 100% tracking in prices with indices having values in multiple 1000’s and ETFs prices in multiple

10’s.

Figure 26 shows the Base Ref of the $MXX and its iShares ETF, EWW, with the USDMXN also

overlayed. Here the base currency is the USD and quote currency the MXN.

Note that the Mexican Peso has steadily been weakening against the USD since 2009, indicated by

the rising black line graph, thereby holding the EWW ETF back when compared to its underlying

index, the $MXX Bolsa.


Figure 26 – EWW compared to USDMXN (black) and $MXX (blue)

SPA3ETF users can set up their own Base Ref charts In Beyond Charts to do these comparisons

including currency variations when considering international ETFs.

One last comparison is shown in Figure 27, a Chinese ETF, FXI, which tracks the Chinese FTSE 50

index, the $XIN0, a large cap Chinese index. The $XIN0 underperforms the $SSEC which contains

many smaller cap stocks. Note that there is no tracking error due to currency movements because

the Chinese currency, the Yuan, is pegged to the USD. This may change.

Figure 27 – FXI compared to its index $XIN0


SPA3ETF Timing for Stocks

SPA3ETF supports a few stocks that use the SPA3ETF ATR Trailing Stop timing mechanism to

determine unambiguous mechanical entry and exit signals.

High profile large cap strong trending stocks were added to the SPA3ETF product after numerous

requests from customers. One of the objectives of SPA3ETF is to achieve a high ratio of effort-to-

return and this is achieved, in turn, by focusing on a few ETFs and now a few stocks which only

requires a few minutes a week, maybe less, to monitor.

The intention is therefore to only extend the SPA3ETF timing to around 20 stocks on each of the U.S

and Australian stock exchanges.

The supported list of stocks for each stock exchange that displays the SPA3ETF timing signals is

available in the ‘SWS Stocks for SPA3ETF’ Watch List in Beyond Charts. This Watch List is

automatically maintained for additions to the SPA3ETF supported stocks list, and deletions, if

required.

Examples of the SPA3ETF signals on a stock are shown in Figure 28, FDX (Fedex) and Figure 29, BHP.

Figure 28

Detailed research results are provided in the SPA3ETF Reference Manual.


Figure 29


Which of the SPA3ETF Strategies to use?

To answer this question the investor will need to spend some time determining their investing

requirements which, in essence, requires that an Investment Plan, also sometimes called a Trading

Plan, be completed, or at least started.

The Share Wealth Systems Education Centre has plenty of material on how to write a Trading Plan

complete with a template Trading Plan with the necessary questions to be answered by the investor.

The “Blueprint to Wealth” trading plan can be easily applied to SPA3ETF, if SPA3ETF is the chosen

method to execute investments in the market.

Hence this material will not be repeated here. At the very least the investor should complete

answers to the sections discussed in “Objectives of SPA3ETF” sections near the beginning of this

manual.

Once this is done then the research results in the SPA3ETF Reference Manual should be perused and

an approach that has a high probability of meeting one’s Risk Objective, Reward Objective and Time

Objective should be considered to begin with.

Some considerations

Before discussing these, one suggestion that all relatively new active investors should seriously

consider is to start with a small amount of capital regardless of how much they have to invest.

‘Small’ will be relative for each investor. Consider this a ‘training wheel’ period of acquiring active

investment skills with this particular approach. The objective of the ‘training wheel’ period is to

acquire skills, not to make profits.

The reason for this is that everybody will make mistakes at the outset of starting something new to

them regardless of what endeavour they take on and it is important that these mistakes are made

when the risk of capital loss due to mistakes is small.

The considerations discussed below are relevant to when the investor has passed their ‘training

wheel’ skills acquisition period.

Also, SPA3ETF users should consider using a Core Satellite Investing Approach to invest with

SPA3ETF. It is suggested that the recordings of two eUGMs in the Share Wealth Systems Education

Centre in the Members Zone are watched that cover the Core Satellite Approach in more detail:

eUGM recording on 27th November 2015, and

eUGM recording on 25th February 2016.

These two eUGM recordings can be accessed here. You will need your Customer ID to log in.

Investment funds that could be applied to SPA3ETF

Investors with a small capital base of between $5,000 and $25,000 that could be applied to SPA3ETF

should consider:

http://www.sharewealthsystems.com/members-zone/eugms/


the SPA3ETF RS Strategy where just a single ETF is invested in at any given time,

leveraging their portfolio at 1.6 to 1, depending of tolerance to extra drawdown.

Investors with larger capital bases of in excess of $1 million that would be applied to SPA3ETF can

consider:

1. the Equal Weighting Strategy,

2. also using the Sector ETFs, say 2 to 5, in addition to 3 to 5 of the index ETF’s already

discussed,

3. ensuring that the more liquid ETFs are used (i.e. don’t use SLYG unless its liquidity increases

considerably),

4. using leverage at 1.6 to 1 for capital bases in the low millions provided that sufficiently

liquid ETFs are used,

5. not using any leverage.

Investors with capital bases in between $25,000 and $1 million that would be applied to SPA3ETF

can consider:

1. any strategy with which they are comfortable but should document their selected approach

in their Trading Plan and then adhere to it through thick and thin while it is their

documented plan,

2. using leverage for portfolios provided that sufficiently liquid ETFs are used, and depending

on tolerance to extra drawdown, and that the necessary trading execution skills have been

acquired.

Time availability

Time poor investors should really use the SPA3ETF RS Strategy where just the single ETF is invested

in at any given time.

What time poor investors must NOT do is simply put their head in the sand and just hand their

investment cash over to somebody else to manage for them without doing the necessary research of

their alternatives. The two main reasons for this are:

1. No investing skills are acquired by not doing the thinking and decision making and, at some

stage, nearly all investors will need to acquire the necessary skills to invest and the only way

that this can be done is by engaging the investing process.

2. Timing is required to avoid a large bear market such that 50%, or greater, of one’s capital is

not lost to the market during a 2008, 2001-2003 Nasdaq or 1987 type bear market. Timing is

also required to determine when to get back into the market.

3. The SPA3ETF app makes managing a simple SPA3ETF strategy as convenient as pulling out

your phone while waiting for the family or a train on the weekend.

Those with more time can consider the SPA3ETF Equal Weighting Strategy and even using the Sector

ETFs.


ETF Liquidity

It is suggested the ETF SLYG is not used for larger portfolios, especially with leverage. Average daily

liquidity in dollars for SLYG during 2014 has ranged between $1.2 million and $2.9 million. If any

position size is calculated to be greater than 10% of the average daily liquidity over the prior 3

months then investors should consider investing in ETF IJR instead of SLYG which is far more liquid.

Whilst SLYG is used as an example, liquidity for all ETFs should be checked by the investor. Beyond

Charts has a simple indicator called ‘Liquidity xMA’. A 63 day period is suggested.

It should also be noted that ETFs are a market maker instrument meaning that the liquidity for an

ETF is not limited by the volume that is bidded, asked and traded in the market for that particular

ETF but rather by the liquidity of the underlying stocks that are constituents of the ETF and the

ability for the ETF provider through their processes to access that liquidity and still maintain a low

tracking error with the index that they continue to track.

This means that there may be more liquidity available than the turnover that is traded in any given

ETF.

Research Results

Spend some time reading through the research results in the SPA3ETF Reference Manual to

determine which approach in SPA3ETF resonates with your investing Objectives, with your Risk

Profile and which mix of ETFs might suit your Risk Profile best.


Hedging the AUD against the USD

Users of SPA3ETF (or SPA3 NASDAQ) whose home currency is the Australian dollar and that execute

strategies using U.S. listed ETFs (or stocks) will be faced with currency risk from time to time. Risk

will occur when the AUD strengthens against the USD when assets invested in USD will lose value in

AUD terms.

The objective of hedging is to protect against large moves of the AUD strengthening against the USD

when the investor has assets in USD. Investors may decide NOT to hedge for many reasons, including

that they view their USD investments as a long term multi-year hedge against the majority of their

assets being in AUD.

Share Wealth Systems has devised a hedging timing system that provides signals to buy the AUD

against the USD when the AUDSUD exchange rate starts rising and then to sell when the AUDUSD

exchange rate starts falling. This is best shown in a chart of the AUDUSD.

Between the red and green signals an Australian investor’s USD portfolio is potentially gaining in

value in AUD terms. And between the green and red signals an Australian investor’s USD portfolio is

potentially declining in value in AUD terms.

The idea, therefore, is for an Australian domiciled investor to hedge one’s U.S. listed ETF and/or

stock portfolio when a green entry signal occurs and to close the hedge when a red exit signal

occurs.

How to hedge

There are a number of instruments that can be used to execute the currency hedge. This topic is

frequently discussed on the Share Wealth Systems Forum so please use the Forum to receive input

and exchange ideas as different broker-dealers and providers change their offerings.


Firstly, the investor will need access to a Forex broker. The different instruments that can be used

include:

1. Forex spot market. This is the most used instrument for short and intraday FX trading.

2. FX Vanilla Options.

3. FX Binary Options.

4. FX Futures.

5. CFD of FX Futures.

Not all FX providers offer all these instruments. And there may be more.

It is not the intention to explain all the advantages and disadvantages of each instrument here as

there is plenty of information on the internet.

The preferred instrument that will be used to hedge the Share Wealth Systems public portfolios is

the CFD of FX Futures on the Saxo Capital Markets platform. The main reasons include:

The ability to hedge in units of a dollar rather in lots or contracts that are not that divisible,

especially for hedging smaller portfolio values.

Once placed there is not Tom/Next overnight interest costs as are charged when FX Spot

positions are held for more than a day.

The code for the CFD of FX Futures on the SCM platform is AUDUSDADmmmyy, where mmm = the

month and yy = the year, for example, AUDUSDADSEP15. The date is when the FX Futures contract

expires on which the CFD is based.

For example, if US$46,400 needed to be hedged when the investor determined that the AUD started

strengthening to ensure that the AUD value of the $US46,400 did not decline in value as the AUD

rose, then the following ticket could be used to execute an AUDUSD hedge trade.

The AUD would be bought at an AUDUSD exchange rate of 0.73135. If the AUDUSD then rose to 0.75

the value of theUS$46,400 would not decline in AUD value.


How much to hedge

The rule of thumb is to hedge the value of the portfolio that is exposed to USD.

If the account is unleveraged then this would be entire account value in USD that is in cash and in

the market.

If the account is leveraged using CFDs then the amount to hedge would be the cash in the account

and any open trade profit. Note the entire leveraged exposure should NOT be the value that is

hedged.

Research Statistics

The table in Figure 30 shows the research stats from June 1991 to June 2015. These statistics do not

include any margin or leverage, just absolute percentage moves.

Note that the average hold period for winning trades was 42.2 trading days which is 8.5 weeks.

However hedge trades can last longer. Bear this in mind when selecting which Expiry date to use.


Figure 30

Getting Started Manual Summary

This concludes the SPA3ETF Getting Started Manual that covers the why and how to use SPA3ETF.

From the preceding sections the SPA3ETF user should know exactly how to execute SPA3ETF using

Beyond Charts and SPA3 TradeMaster, that is, what actions to take on a daily and weekly basis. The

SPA3ETF user should know why they are using SPA3ETF and what their objectives are.

The separate SPA3ETF Reference Manual that is provided by Share Wealth Systems details extensive

research results in the way of statistics and simulated portfolio outcomes. These are very necessary

to understand the existence of an ‘edge’, how good the ‘edge’ is and what to expect from the ‘edge’

in future execution. This breeds confidence to be able to execute the ‘edge’ as it is intended.

The SPA3 Reference Manual should also be used to assist in determining what mix of ETFs to use

going forward.

Long Only Buy & Hold

Starting Capital $100,000.00 $100,000.00

Ending Capital $292,853.63 $102,219.28

Net Profit % 192.85% 2.22%

Annualized Gain % 4.57% 0.09%

Exposure 43.11% 100.00%

Number of Trades 108 1

Avg Profit/Loss % 1.11% 2.22%

Avg Bars Held 25.44 6,237

Winning Trades 50 1

Winning % 46.30% 100.00%

Avg Profit % 3.96% 2.22%

Avg Bars Held 42.2 6,237.00

Max Consecutive 4 1

Losing Trades 58 0

Losing % 53.70% 0.00%

Avg Loss % -1.34% 0.00%

Avg Bars Held 11 0

Max Consecutive 5 0

Max Drawdown % -13.39% -41.41%

Max Drawdown % Date 24/08/2004 2/04/2001

Payoff Ratio 2.9563 INF

Sharpe Ratio 0.6819 0.0579

Expectancy 0.8316 0


Version Changes for the SPA3ETF Manuals

Version 1.1 – May 2015

1. The requirement of the Low being greater than the previous trough Low as part of the

SPA3ETF RS Strategy.

2. Figure 2, changed to remove a moving average to avoid confusion about the MA possibly

being part of the rules.

3. Figure 2.1 added to show an example of ‘today’s Low’ being less than the most recent

trough Low.

4. Some simulation results were incorrect due to 1 or a few trades being dropped from the

simulations due to the way that the simulation software handles positions sizes. This means

that most simulations hold too much cash and hence may be understated over time. But

better to understate than overstate.

5. Updating of Performance Summaries with differences align with research changes as per

point 2 above.

6. Added Position Size and Equity to Trades Table.

7. Completion of the Portfolio Management section.

8. Various minor typos such as Figure and Table references and bullet point numbering.

Version 1.2 – June 2015

1. Further explanation of the SPA3ETF indicators.

2. Setting up a ROC 126 Overlay in Beyond Charts.

3. Position sizing for using CFDs added to the SPA3 TradeMaster section.

4. Various minor typos.

Version 1.3 – August 2015

1. AUDUSD Hedging using the Customised ATR Trailing Stop.

Version 1.4 – October 2015

1. Split of SPA3ETF Reference Manual into two Manuals: the SPA3ETF Getting Started Manual

and the remaining SPA3ETF Reference Manual.

Version 2.0 – May 2016

1. Inclusion of SPA3ETF Timing for Stocks in both SPA3ETF Manuals.

a. This also included the addition of research results for the stocks in the SPA3ETF

Reference Manual.

2. Addition of the SPA3ETF Ranking feature in Beyond Charts.

3. More explanatory material added and readability improved in both Manuals.


Version 2.1 – July 2016

1. Inclusion of SPA3ETF Ranking Feature.

Version 2.2 – September 2016

1. Notes about Share Wealth Systems app included.

spa3etf · 2016. 9. 18. · outperforming the s&p500 and its respective index funds whilst also...

Documents