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

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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. Notable Trends and Observations

  2. Composite ETF Cumulative Returns Momentum Bar plot

  3. Composite ETF Cumulative Returns Line plot

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

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

  6. Implied Cost of Capital Estimates

  7. 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) . 

LAST 252 TRADING DAYS

LAST 126 TRADING DAYS

LAST 63 TRADING DAYS

YEAR-TO-DATE LAST 41 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:

USING IMPLIED VOLATILITY TO PREDICT ETF RETURNS (2/20/16)

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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 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

PORTFOLIO SEVEN:

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

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

CUMULATIVE GROSS PRICE RETURN (ALL PORTFOLIOS)

PORTFOLIO EIGHT:

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

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

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)

/

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