ETF Core Strategies
Aim: To trend-trade general equity ETFs so as to ride rallies and buck busts in the Australian share market.
No timing model is perfect, but a good timing strategy should pass two tests:
Each of our strategies meets these requirements based on past simulations of performance. For instance, over the 28 financial years to June 2012, the upgraded Conservative Strategy had 75% winning to 25% losing trades. A trade is a buy/sell transaction. The losing trades averaged -3.4% (max -7.0%) and the winning trades averaged +18.7% (max +103.9%).
The Conservative Strategy had 62% losing to 38% winning inverse trades. Inverse trades are the reverse of normal trades since they represent sell/buy transactions. These losses and wins were not actual losses and wins, but opportunity cost and gains from being out of the market. The average opportunity cost was -3.8% (max -9.6%) and the average opportunity gain was +11.9% (max +37.3%). It’s normal for market timers to have more losing inverse trades than winning ones.
Market timers often refer to whipsaws which are defined as quick and sharp reversals of market direction that result in losses (i.e. opportunity costs) from either buy or sell signals being aborted. On this definition, the Conservative Strategy had an average whipsaw loss of -3.6% (max -9.6%) on adverse trades over the last 28 financial years to June 2012.
Whipsaws and indeed all losing trades are the bane of market timing systems, but they should be seen as an "insurance premium" for being out of the market when it could fall precipitously. One reason market timing works is that while only a minority of market exits are correct, when they are right they save investors from losing a lot of money. For instance, from the 14 October 2007 to 1 March 2009, being out of the market as a result of the Conservative Strategy’s signals would have prevented a loss of over 40% of capital.
Detailed back-tested results for each Strategy, distinguishing between its buy/sell trades, sell/buy inverse trades and whipsaws, are available to subscribers on the subscriber-only pages of this website.