COMPOSITE MACRO ETF WEEKLY ANALYTICS (2/20/2016)

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FOR A DEEPER DIVE INTO ETF PERFORMANCE AND RELATIVE VALUE SUBSCRIBE TO THE ETF INTERNAL ANALYTICS PACKAGE HERE

LAYOUT (Organized by Time Period): 

  1. Composite ETF Cumulative Returns Momentum Bar plot

  2. Composite ETF Cumulative Returns Line plot

  3. Composite ETF Risk-Adjusted Returns Scatter plot (Std vs Mean)

  4. Composite ETF Risk-Adjusted Return Correlations Heatmap (Clusterplot)

  5. Implied Cost of Capital Estimates

  6. Composite ETF Cumulative Return Tables

  7. Notable Trends and Observations

COMPOSITE ETF COMPONENTS:

LAST 252 TRADING DAYS

LAST 126 TRADING DAYS

LAST 63 TRADING DAYS

Year-to-date LAST 36 TRADING DAYS

LAST 21 TRADING DAYS

LAST 10 TRADING DAYS

Implied Cost of Capital Estimates:

To learn more about the Implied Cost of Capital see here.

CATEGORY AVERAGE ICC ESTIMATES

ALL ETF ICC ESTIMATES BY CATEGORY

Cumulative Return Tables:

Notable Observations and Trends:

  • Unfortunately not much has changed this week. Many of the themes I identified last week appear to be ongoing.
  • Defensive positioning is still prevalent as Precious Metals Miners and Precious Metals have continued to outperform.  
  • The relative strength of the Emerging/Frontier and Consumer Discretionary composites over the last 21 and 10 days respectively is somewhat interesting. This gives the appearance of "Risk-On" but the other evidence implies investors should tread carefully.
  • My current working theory is that T-Bonds provide a safe yield for global investors given the increasing popularity of NIRP. The corollary to that thesis is that the Precious Metals complex acts like a put on runaway Central Bank policy. It is likely that Precious Metals will continue to show relative strength until NIRP is removed from the Federal Reserve's policy discussion.

Backtesting the Implied Volatility Strategy with Quantopian (2/17/16)

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To see the origin of this series click here. 

I've been tracking this strategy for ~7 weeks now and it appears to have substance. To summarize, the strategy calculates a SKEW measure using ATM calls and OTM puts for a collection of ETF symbols. It then sorts the symbols into quintiles based on the SKEW metric.

Using daily close/close return calculations for this strategy has shown exceptional performance as can be seen here. However, translating a successful daily strategy with no transaction costs and perfect trading fills into a robust strategy that can execute and perform well after incorporating the real structure of market trading is a difficult task. In some cases the strategy cannot survive this translation.

In order to test the viability of this strategy I used the Quantopian platform, which allows event-based point-in-time simulated trading on real market data. It also allows us to model transaction costs and slippage which can have large impacts depending on the strategy. 

The following backtest is a variation on the original strategy proposed in the series. This strategy uses the top/bottom SKEW quintiles and goes long/short each ETF respectively. The portfolio size is $100K USD. The holding period is one week. It buys/shorts the stocks 30 minutes prior to the market close on the first trading day of the week and liquidates previous holdings on the first trading day of the week 5 minutes after the market opens. 

Thus far, even after incorporating realistic trading costs the performance is intriguing to say the least.

USING IMPLIED VOLATILITY TO PREDICT ETF RETURNS (2/13/16)

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FOR A DEEPER DIVE INTO ETF PERFORMANCE AND RELATIVE VALUE SUBSCRIBE TO THE ETF INTERNAL ANALYTICS PACKAGE HERE

 

To see the origin of this series click here

In the paper that inspired this series ("What Does Individual Option Volatility Smirk Tell Us About Future Equity Returns?") the authors' research shows that their calculation of the Option Volatility Smirk is predictive of equity returns up to 4 weeks. Therefore, each week, I will calculate the Long/Short legs of a portfolio constructed by following their criteria as closely as possible. However this study will focus on ETF's as opposed to single name equities. I will then track the results of the Long/Short portfolio, in equity returns, cumulatively for 4 weeks before rotating out of that portfolio. The ETF's are selected from the following groups:

PORTFOLIO THREE

Longs: VWO, KRE, XLU, EEM, HEDJ

Shorts: EWW, HACK, JNK, XLP, IYR

PORTFOLIO FOUR

Longs: XRT,  XLY,  XLP,  XHB,  GDXJ,  IYT,  XME,  MDY

Shorts: EPI, XLU, HEDJ, JNK, EWQ, VEU, XLI

PORTFOLIO FIVE

Longs: VO, GDX, XHB, XLB, HACK, XLY, XLP, XLU

Shorts: ACWI, VWO, IYJ, VB, VPU, ECH, VGK, IWB

PORTFOLIO SIX:

LONGS: IJR, ACWI, IJH, KBE, VWO, XLY, XLU, IYG

SHORTS: EWU, XHB, VXUS, VPU, IXC, EWW, VGK, EPI

CUMULATIVE GROSS PRICE RETURN (ALL PORTFOLIOS)

PORTFOLIO SEVEN:

LONGS: RTH, FDN, IDU, EPI, HACK, XLU, IYG, HEDJ

SHORTS: EWA, MOO, VOX, VGK, EWH, EWW, IAU, IJR

COMPOSITE MACRO ETF WEEKLY ANALYTICS (2/13/2016)

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FOR A DEEPER DIVE INTO ETF PERFORMANCE AND RELATIVE VALUE SUBSCRIBE TO THE ETF INTERNAL ANALYTICS PACKAGE HERE

LAYOUT (Organized by Time Period): 

  1. Composite ETF Cumulative Returns Momentum Bar plot

  2. Composite ETF Cumulative Returns Line plot

  3. Composite ETF Risk-Adjusted Returns Scatter plot (Std vs Mean)

  4. Composite ETF Risk-Adjusted Return Correlations Heatmap (Clusterplot)

  5. Implied Cost of Capital Estimates

  6. Composite ETF Cumulative Return Tables

  7. Notable Trends and Observations

COMPOSITE ETF COMPONENTS:

LAST 252 TRADING DAYS

LAST 126 TRADING DAYS

LAST 63 TRADING DAYS

year-to-date LAST 31 TRADING DAYS

LAST 21 TRADING DAYS

LAST 10 TRADING DAYS

Implied Cost of Capital Estimates:

To learn more about the Implied Cost of Capital see here.

CATEGORY AVERAGE ICC ESTIMATES

ALL ETF ICC ESTIMATES BY CATEGORY

Cumulative Return Tables:

Notable Observations and Trends:

  • Investors appear to be increasing their defensive positioning in the market as evidenced by the continued relative strength in the Precious Metals/Precious Metals Miners and Treasury Bond composites.
  • Investors appear to be liquidating previous high performing asset classes as evidenced by Healthcare being among the bottom 3 performers off all composites across 5/6 timeframes beginning over the last 126 days. 
    • This is also supported by further deterioration in the relative performance of the Technology composite, which appears as a bottom 3 performer year-to-date.
  • Correlations still appear relatively binary. However, a notable change is occurring in the correlation of Oil and Gas with the rest of the Sector based composites. It appears to be weakening year-to-date as compared to the last 126/252 trading days. 
  • The Treasury bond composite is seeing a notable increase in its negative correlation with the rest of the market as well. I look for this trend to continue as long as the global Negative-Interest Rate Policy trend continues. The US offers relatively high yield when compared to negative rates!

FOR A DEEPER DIVE INTO ETF PERFORMANCE AND RELATIVE VALUE SUBSCRIBE TO THE ETF INTERNAL ANALYTICS PACKAGE HERE

USING IMPLIED VOLATILITY TO PREDICT ETF RETURNS (2/06/16)

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To see the origin of this series click here

In the paper that inspired this series ("What Does Individual Option Volatility Smirk Tell Us About Future Equity Returns?") the authors' research shows that their calculation of the Option Volatility Smirk is predictive of equity returns up to 4 weeks. Therefore, each week, I will calculate the Long/Short legs of a portfolio constructed by following their criteria as closely as possible. However this study will focus on ETF's as opposed to single name equities. I will then track the results of the Long/Short portfolio, in equity returns, cumulatively for 4 weeks before rotating out of that portfolio. The ETF's are selected from the following groups:

PORTFOLIO TWO

Longs: VPU, IJR, FEZ, IWB, INDA, HEDJ, IYT

Shorts: LQD, EWW, IAU, VDE, EWT, EEM, EWH

PORTFOLIO THREE

Longs: VWO, KRE, XLU, EEM, HEDJ

Shorts: EWW, HACK, JNK, XLP, IYR

PORTFOLIO FOUR

Longs: XRT,  XLY,  XLP,  XHB,  GDXJ,  IYT,  XME,  MDY

Shorts: EPI, XLU, HEDJ, JNK, EWQ, VEU, XLI

PORTFOLIO FIVE

Longs: VO, GDX, XHB, XLB, HACK, XLY, XLP, XLU

Shorts: ACWI, VWO, IYJ, VB, VPU, ECH, VGK, IWB

CUMULATIVE GROSS PRICE RETURN (ALL PORTFOLIOS)

PORTFOLIO 6:

LONGS: IJR, ACWI, IJH, KBE, VWO, XLY, XLU, IYG

SHORTS: EWU, XHB, VXUS, VPU, IXC, EWW, VGK, EPI

ETF SKEW LONGS

IJR

ACWI

IJH

KBE

VWO

XLY

XLU

IYG

ETF SKEW SHORTS

EWU

XHB

VXUS

VPU

IXC

EWW

VGK

EPI