An Expanded ETF Relative Strength Rotation System

I previously detailed a relative strength ETF rotation system based solely on three ETFs: SPY, GLD, and SHY. The system was more or less for explanation purposes and not an optimized strategy.

Using ETF Replay‘s relative strength backtest system an investor can backtest various user defined ETF portfolios.  I decided to expand the very basic 3 ETF system that looks at the relative strength return of GLD (Gold), SPY (S&P 500), and SHY (Barclays Low Duration Treasury ETF, a close substitute for cash) to 13 ETFs.  The strategy ranks 13 ETFs based 40% on the 3 month return, 30% on the 20 day return, and 30% based on the 20 day volatility.  The backtest started in 2005 (when some of the ETFs started trading) and rebalanced by purchasing the top 2 ETFs monthly. No commissions, slippage or taxes are assumed.  The benchmark I used was buying and holding SPY. Please check back shortly on Scott’s Investments as I will be expanding this screen and tracking the results on a monthly basis.

The ETFs used in the screen were EEM (emerging markets) ,EFA (EAFE Index) ,GLD (gold) ,HYG (high yield bond), IEF (7-10 year treasury), SHY (short-term bond, close ETF substitute for “cash”), SPY (S&P 500), TLT (20+ year treasury bond), VBR (small-cap value), VNQ (REIT), XLE (energy sector) , XLU (utility sector), and PCY (Emerging market bonds).  Some of the ETFs started trading after 2005, which is one limitation of backtesting ETFs given their limited trading time-frame.

The returns for a relative strength system that rotates between the 13 ETFs, purchasing the top 2 each month, have been impressive over the past 5 years.  The total return to date is 189.5% vs 0.5% for SPY.  More impressive, the volatility for the system is 16.6% versus 23.7% for SPY.  The system made 59 changes or “trades” over the past 5+ years.

There are a number of variations an investor could use with the system as well as different ETF portfolios.  For those interested in reading about relative strength ETF investing, there is also a new book available by Leslie Masonson Buy–DON’T Hold: Investing with ETFs Using Relative Strength to Increase Returns with Less Risk which is on my reading list but which I have not yet reviewed or read.

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2 thoughts on “An Expanded ETF Relative Strength Rotation System”

  1. Thanks. This is an interesting system. I've got it set up on ETFreplay. I look forward to you tracking it monthly on your site.

    Will it appear on the right-hand side of your site? (Sorry…I'm fairly new here and still getting familiar with everything.)

    Thanks again.

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