Tuesday
Mar242009
ETF Asset Classes
Tuesday, March 24, 2009 at 9:29PM 
The last post I explored the ETF screener function at Portfolio123 while focusing on Styles. Today I am trying out the screener with ETF asset classes.
Portfolio123 categorizes ETFs into the following Asset Classes:
The screen I am going to present and backtest is similar to the one presented in the previous post. But this time around, instead of holding the top ETF for each Style I am setting the rules to hold the top 2 ETFs for each Asset Class. In theory this should give a pretty good diversification of holdings. Like last time around I am using the liquidity rule: AvgDailyTot(60) > 1000000. I am also using the same ranking criteria Close(0)/Close(250) as before. So here is what the setup looks like:
The FOrder function looks for all ETFs with the same Style and sort them in descending order based on the one year price rise. Now on to the backtest. I set up the backtest as follows:
In the last post I mentioned that a 4 week rebalance period makes it necessary to run the backtest four times while stepping back one week each time. Instead of doing this I decided to run with a weekly backtest. This eliminates the need to run four backtests. Weekly rebalance results are below.
Then I decided to try a daily rebalance. Here are the results:
Now the results are pretty good but one has to realize that the holdings are rebalanced on a daily basis. This means that one holding cannot grow relative to the others and cause volatile swings as the ETF goes up and down. So it is really imperative for Portfolio123 to provide simulation backtest to make this a bit more realistic. In real life it would be difficult to rebalance every day without sustaining significant expenses in commissions. I believe the technical term for this is unobtainium.
Next I want to show is a snapshot of typical holdings. See below. The diversification is much better than for the Styles typical holdings shown in the last post. I'm much happier with this.
| Alternative |
| Commodities |
| Currencies |
| Equity |
| Fixed Income |
| Mixed Assets |
The screen I am going to present and backtest is similar to the one presented in the previous post. But this time around, instead of holding the top ETF for each Style I am setting the rules to hold the top 2 ETFs for each Asset Class. In theory this should give a pretty good diversification of holdings. Like last time around I am using the liquidity rule: AvgDailyTot(60) > 1000000. I am also using the same ranking criteria Close(0)/Close(250) as before. So here is what the setup looks like:
The FOrder function looks for all ETFs with the same Style and sort them in descending order based on the one year price rise. Now on to the backtest. I set up the backtest as follows:
In the last post I mentioned that a 4 week rebalance period makes it necessary to run the backtest four times while stepping back one week each time. Instead of doing this I decided to run with a weekly backtest. This eliminates the need to run four backtests. Weekly rebalance results are below.
Then I decided to try a daily rebalance. Here are the results:
Now the results are pretty good but one has to realize that the holdings are rebalanced on a daily basis. This means that one holding cannot grow relative to the others and cause volatile swings as the ETF goes up and down. So it is really imperative for Portfolio123 to provide simulation backtest to make this a bit more realistic. In real life it would be difficult to rebalance every day without sustaining significant expenses in commissions. I believe the technical term for this is unobtainium.
Next I want to show is a snapshot of typical holdings. See below. The diversification is much better than for the Styles typical holdings shown in the last post. I'm much happier with this.
Finally, to answer the critics who argue that ETFs have changed over the years and should only be back-tested over a one-year time frame. Here is a daily rebalance backtest for the last year:
So let's press Portfolio123 management to get the ETF simulation/ports going so we can get on with investing. I have lots of new fresh ideas and I can't wait to write my next post.
Steve
Sponsored by Stock Picks
Reader Comments (5)
Hi Steve,
Thanks for posting your work.
I see that you are using ETF Universe 1. Is this a custom universe? If so, what criteria did you use to create this universe?
Greetings,
Jorge
Hi Jorge - The ETF universe is not custom. All ETFs are enabled. We really need sims before judging how good the backtest is.
Steve
I really liked this post. Can I copy it to my site? Thank you in advance.
It's not a custom universe.
Steve
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