The 2nd strategy is a the Turn-on-the-Month implementation applied to a universe of 26 ETF’s. Excellent risk vs reward results are achieved, reflected by an annualized sharp ratio of 5.56. Details below. Signals of this strategy will be provided through this blog starting end of June 2010.
The seasonal strategy is based on the Turn-of-the-Month anomaly. This effect is discussed on various forums and Michael Stokes recently confirmed its validity in his analysis.
The strategy will be applied to a universe of 26 ETF’s representing a broad range of indexes across various asset categories. ETF’s are used as they show lower volatility compared to shares and offer low-cost access to index trading for small investors. ETF’s included in the universe are: DIA, EEM, EFA, EWH, EWJ, EWT, EWZ, FXI, GLD, GSG, IEF, ILF, IWM, IYR, QQQQ, SPY, VNQ, XLB, XLE, XLF, XLI, XLP, XLU, XLV, XLY, XLK.
Entry & Exit
The strategy enters a long position, at the last day of the month, in ETF’s that are trading above a medium term moving avarage (WMA89) of the closing price. It will hold its position for a maximum two days or closes the position after a upday.
Money Management & Ranking
Initial Equity is assumed to be 10.000$ as we are looking for to run strategies for small investors. The equity is split into 2 positions of 5000$. Going for smaller positions would increase transaction cost% to an unacceptable level.
To determine what two ETF’s are traded, ETF’s are ranked by a calculation that multiplies short-term 2-day returns with long term 2-day returns. The top 2 ETF’s in that ranking are selected.
Below is a graphical summary of the simulation over the period 1-1-2003 through 22-6-2010. Transaction fees based on Interactive Brokers fee structure have been included. Slippage costs have been kept at 0% as the strategy uses MOC and MOO orders.