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%
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