Where is all that ETF Money Invested ?…..Why ?

May 3, 2012

I use the S&P 500 ( SPY ) as the benchmark for  measuring  my ETF selection and timing  performance.

It has occured to me, if I could list  the top 10 ETFs,  ranked by dollar  assets ( funds invested in each ) I’d have a pretty good picture of how funds are allocated across the ETF universe ( because these ” BIG TEN are favored by pension funds, hedge funds, and major investors  due to the liquidity they offer ) …and the list could be used to develop  another ” norm ” for performance measurement purposes.

I pretty sure I remember obtaining  the BIG TEN asset breakdown from an article appearing  on the ” Seeking Alpha ” website.

Here it is;

SPY and IVV ( Vanguard ETF ) combined 34.1%

GLD  17.3%

EEM 9.9%

EFA  9.6%

QQQ  8.9%

TIP  5.6%

VTI  5.4%

LQD  5.0%

IWF  4.2% 

I took a hypothetical amount of money, ( $ 1 million ), divided it into the above percentages, and bought as many shares as I could with each percentage.

The result;  a BIG TEN  portfolio which reflects the present allocation proportionality of investments in each of the 10 largest ETFs.

And, how does the performance of this ” ETF fund of funds” back test against the SPY benchmark ? ….. The ” BIG  TEN portfolio is weighted by the actual percentage of investment in each symbol. 

The result – – – Going back a year, six months, three months and year to date – – SPY has outperformed  the asset allocation weighted BIG TEN portfolio by 3%.   SPY has out performed the BIG TEN portfolio in every period.

What this  says to me,  is that unless I can be certain I can  change the result of BIG TEN versus SPY  by  eliminating or re-weighting  some symbols, my time would be better invested  simply by concentrating  on when to own SPY, and when not to own SPY. If I know me, I’ll be tinkering with both methods.   Working on these mechanisms is my equivalent of fine tuning the timing of a 56 Chevy ! Lots of fun!

In the above tests,  SPY was held throughout the periods examined and its total return, including dividends for each period was  ( a ) 12 months 5.6%….(b ) ….6 months 13%….( c )…..3 months 6.4% and ( d ) ,year to date,  ( May 3 ) 12.3%…..                                                              

Going further,…now I can back test the chart performance of SPY to see which indicators would create buy / sells to beat the above  buy / hold performance of SPY at 5.6% held  for one year.

Lets start with  May 3, 2011 to May 3, 2012,  buying / selling every time SPY crosses its 100 day moving average.  We are trying to reduce number of trades. The result would have been 5 round trips losing a total of  6.2% and one buy, November 30,2011 which would still be open and ahead 12.6%…..net profit for the period ( unrealized ) 6.4% ( $64,000 on $1 million )versus buy and hold, 5.6% ( $56,000 on $1 million ) without taking trade commissions into consideration.  Of course if you are doing this with $1 million, the commission on 5 round trips, $70- is not very much of a consideration against the $8,000 differentiated profit resulting from trading.

And,  all of this  can be refined further using different rules such as starting dates,  different  moving averages , . 

Bottom line… I am certain there is money to be made by trading SPY.  But, my goal isn’t 6.4%, it is 9.0% when the 10 year Treasury yield is 2%.  So, I need to continue to tinker with my SPY timing variables and learn by trial and error.  And, I want to study how re-balancing the BIG TEN to conform to my specific market vision will fare against SPY.

Something tells me this will not be a short or un-eventful voyage of discovery ! 

I’ll keep you abreast of my progress.

Richard Gore…. aka  Rich, Dick , RMG and Smiley from Woodlawn

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