March 05, 2016

2016)

March 05, 2016/ Brian Christopher

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

LAYOUT (Organized by Time Period):

Composite ETF Cumulative Returns Momentum Bar plot
Composite ETF Cumulative Returns Line plot
Composite ETF Risk-Adjusted Returns Scatter plot (Std vs Mean)
Composite ETF Risk-Adjusted Return Correlations Heatmap (Clusterplot)
Implied Cost of Capital Estimates
Composite ETF Cumulative Return Tables
Notable Trends and Observations

COMPOSITE ETF COMPONENTS:

Notable Trends and Observations

LAST 252 TRADING DAYS

Click here for help understanding this chart

Last 126 trading days

year-to-date last 46 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:

Precious Metals Miners (PMM) continue to dominate all other composites appearing as the number one outperformer several weeks in a row across multiple timeframes. This week the PMM composite is number one across the last 126 days through the last 10 days.
Healthcare has continued to underperform this year and while it had positive returns over the last 10 days it was still a bottom 3 performer.
The markets were "Risk-on" with with T-Bonds underperforming for the last 21 days while even the Oil and Gas composite rallied towards the end of the week and finally disappeared off the worst 3 performers list last 10 days.
Are these bullish signs that risky assets will continue to gain, or is the market simply in a cyclical mean reversion regime where we should expect buying to be met by selling and selling to be met with more buying? The answer remains to be seen...

February 27, 2016

BACKTESTING THE IMPLIED VOLATILITY STRATEGY WITH QUANTOPIAN (2/27/16)

February 27, 2016/ Brian Christopher

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.

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 factor.

Using daily close/close log 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 does the following:

Calculate the SKEW factor using options data and implied volatility for selected ETFs.
Sort the ETFs according to the SKEW factor and divide into quintiles.
Go long the ETFs in top quintile while shorting the ETFs in the bottom quintile.
The strategy is equal weight and market-neutral.
Holding period is one week.
Trades are initiated on the first day of the week 20 minutes prior to the market close.
Rebalancing/liquidation occurs on the first day of the trading week 5 minutes after the market open.
The portfolio size is $100,000 USD.

The strategy continues to impress with an annualized Sharpe ratio exceeding 5, single digit volatility, and extremely low sensitivity to the broad market as evidenced by the sub 20 beta. If I had access to point in time options data I would like to test this strategy during long trending periods to see if it is robust in multiple market environments.

February 27, 2016

USING IMPLIED VOLATILITY TO PREDICT ETF RETURNS (2/27/16)

February 27, 2016/ Brian Christopher

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 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

PORTFOLIO SEVEN:

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

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

PORTFOLIO EIGHT:

LONGS: IYG, XLP, EWW, EPI, MDY, XLU, IYR, IAU

SHORTS: HEDJ, INDA, IWB, VXUS, EWS, EZU, EWU, LQD

CUMULATIVE GROSS PRICE RETURN (ALL PORTFOLIOS)

PORTFOLIO NINE:

LONGS: HACK, EWW, XLV, XLY, XLB, ECH, IVV, IYE, XLP

SHORTS: KRE, VO, XHB, VXUS, HEDJ, XRT, FEZ, BND

February 27, 2016

COMPOSITE MACRO ETF WEEKLY ANALYTICS (2/27/2016)

February 27, 2016/ Brian Christopher

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

LAYOUT (Organized by Time Period):

Notable Trends and Observations
Composite ETF Cumulative Returns Momentum Bar plot
Composite ETF Cumulative Returns Line plot
Composite ETF Risk-Adjusted Returns Scatter plot (Std vs Mean)
Composite ETF Risk-Adjusted Return Correlations Heatmap (Clusterplot)
Implied Cost of Capital Estimates
Composite ETF Cumulative Return Tables

COMPOSITE ETF COMPONENTS:

Notable Observations and Trends:

Cumulative returns across a broad spectrum of composites remain weak evidenced by only Utilities and Treasuries showing gains over the last 252 days.
Mid January appears to be a major turning point/trend change for the Precious Metals Miners composite. Looking at the last 126 days Best/Worst plot shows a sharp V bounce which has continued since.
Investors positioning still looks defensive over the longer frames of 252, 126, 63 days as evidenced by the outperformance of the Precious Metals complex, Utilities, and Treasuries.
The market overall still looks binary (risk-on/risk-off) as evidenced by the increase in inverse correlations across timeframes between risk assets (sectors, global, emerging equity) and defensive assets (precious metals, bonds, utilities, telecom) .