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Global Trader Global ETF Trading Strategy
More than half of the world's market capitalization lies outside the U.S. And while the U.S. is the engine that often drives much of the world, sometimes that engine sputters. When it does, capital flows out of the U.S. and into other markets. After all, money doesn't sleep.
"Periodically, there are long periods when international stocks outperform U.S. stocks," says Paul A. Merriman, founder of Merriman Wealth Management, a Seattle-based investment advisory firm. "A recent example is the period from 2000 through 2009," says Merriman. |
"In those 10 years, the Standard & Poor’s 500 Index had a compound annual loss of 0.9%. International asset class returns in that period ranged from 1.2% to 12.8%. Those who invested exclusively in large-cap U.S. stocks had reason to be profoundly disappointed; those who added international stocks had reason to be glad they had done so." --MarketWatch.com
Strategy Assets
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The easiest solution would be to buy ACWI and be done with it. The iShares ETF tracks a market-cap-weighted index of large and midcap global stocks, and covers 85% of developed and emerging markets, including the U.S. Since its inception in March 2008, it has returned a CAGR of 4.3% (as of 12/31/2018).
Another solution would be to pick and choose global assets, that is, allocate a portion of your portfolio to an emerging markets fund (such as EEM), a portion to a European fund (FEZ), etc., etc. The problem is, even the best of these funds will go through patches that will clobber your portfolio. EEM, for example, lost -16.9% in the 6 years from 2011 to 2016, while the U.S. market was soaring (SPY up 101.2% during the same period). That makes it tough for buy-and-hold investing. I think we can do better through careful selection and timing. To start, the following international and domestic funds have been identified for inclusion in the Global Trader strategy:
Now, the selection and timing. |
The Mechanics
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Each quarter, the strategy conducts a risk-adjusted momentum test with a moving average filter on the 5 ETFs mentioned above. Based on that test, it selects the strongest candidate and buys that ETF. Should none meet the performance criteria, the strategy reverts to a safe harbor investment, namely TLT, the popular iShares 20+ Year Treasury Bond ETF.
I could have stopped right there. In fact, subscribers may want to do just that; rotating quarterly among these 5 ETFs has delivered a 19.9% CAGR over an 11-year backtest. But in an effort to reduce the max drawdown (maxDD) from -17.8% to something more reasonable, I added a hedge. So, 30% of the portfolio rotates monthly between a hedge made up primarily of currency ETFs and international sector funds, bringing down the maxDD to -15.8% and reducing volatility from 19.5% down to 16.4%. Luckily, CAGR doesn't suffer - coming in at 20.1%. So, at any given time, the Global Trader portfolio holds one broad-market international or domestic equity ETF comprising 70% of the portfolio, and one hedge ETF making up the remaining 30%. Or, our "flight to safety" bond fund TLT stepping in to some portion of the portfolio. Performance notes: The strategy has returned 647.2% over the 11-year period 2008-2018, compared to the S&P 500's 116.8%.  Tap to enlarge.
All this, with a significantly improved maxDD and Sharpe Ratio (gauge of risk to reward).
Note: while the strategy rotates out of higher-risk equity funds and into the relative safety of TLT in the event of a global market downturn, nothing short of perpetually holding cash or cash ETFs will protect in the event of a flash crash or a sudden jolt to the market. That said, the pain from most market downturns (i.e. recessions, bursting bubbles, market corrections) can be mitigated by a strategy that switches to relative safety within weeks. |
What You Get
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Before the market opens on the first trading day of the month, you'll receive an email newsletter detailing the same actionable buy/sell signals that I will use to trade the strategy in my portfolio.
See a sample email newsletter to the right >>> Subscribers also gain access to the Members Page, offering up more strategy details, month-to-month performance data, and an FAQ specific to the strategy. |
Ready? |
The Global Trader Strategy is $7.95 per month. Cancel at any time. Follow along and see how the strategy catches market moves to the upside, while protecting hard-earned portfolios against major downdrafts.
First 2 months are FREE. Go to the subscription page to SIGN UP. |