The Benefits of Systematic Investing

The Benefits of Systematic Investing


The Benefits of Systematic Investing

A systematic (also called 'quantitative' or 'rules-based') investment strategy can provide you with many advantages over the traditional, discretionary approach to selecting investments. This article will delve into the reasons why investors from all walks of life are embracing systematic investing, and why ETFOptimize is dedicated to this approach for the models in our ETF Investment Strategy Suite.

First, let's define the two distinct approaches to investing:

1) Systematic investment strategies (commonly associated with the term 'quant' or 'rules-based'), is an approach where the investor uses computer models for an automated, data-driven, and repeatable method, reviewing many different securities and using many parameters or 'factors' to drive its security selection and timing decisions; or

2) Discretionary investing (also called 'traditional' or 'fundamental'), which is an approach that relies on the skill of a fund manager, investment advisor, or the individual investor to make an in-depth analysis of a relatively limited number of securities to determine security selection and timing.

The discretionary approach has historically dominated investing, partially a result of the previous lack of robust and inexpensive computer capabilities.  Discretionary investment management relies on a traders experience and knowledge to decide which investments are most appropriate. The discretionary manager must constantly monitor financial markets and investment-related news. They must know how various factors are likely to affect the portfolio and make changes that position the portfolio to meet the goals of the investor as market conditions fluctuate. Most importantly, the discretionary manager relies on their judgment as the final determinate of the portfolio's positions and exposure.

Unfortunately, as many investors are well aware, human judgment is quite fallible. When markets get turbulent, discretionary investors are left to rely on limited information with subjective and often risky bets that often go wrong. Evidence of this is in the average return of mutual fund managers. While the S&P 500 index has an average annual, long-term return of 7.5%, the average mutual fund manager only achieves a long-term return of 2.6%!


Over the last 30 years, there has been an exponential improvement in computing power, the development of sophisticated analytical software, and significant new thresholds achieved in the extensiveness and accuracy of econometric and investment databases. These strides have led to tremendous advances in the fields of investment research and money management. As a result, quantitative portfolio management strategies have become increasingly more powerful and effective and are being embraced by investors at all levels.

Systematic investing strategies provide an investor with instant analysis of thousands of data points about thousands of potential stock or ETF investments. Your Premium ETFOptimize Investment Strategy will instantly analyze these thousands of data points to determine the most favorable ETF to own at any given time based on the identification of a definite edge.

Veteran finance professionals with decades of experience in the investment markets and in designing quantitative investment strategies constructed the algorithms that ETFOptimize uses to make these decisions. Each strategy is back-tested, forward-tested, stress-tested, robustness-tested, out-of-sample tested, real-time tested and tested again before being considered as a viable addition to our ETF Investment Strategy Suite.

One significant advantage of a systematic investment strategy is that the algorithms are never influenced by the typical human challenges of fatigue, time limitations, family problems, over-enthusiasm or under-enthusiasm, mood swings, hopes, fears, or the investment decision-maker simply having a bad day.

Quantitative, rules-based strategies eliminate all the all-to-human behavioral issues that can cause losses, or at the very least, inconsistency in your portfolio performance.
Systematic investing is NOT:

• High-Frequency Trading
• Computers robo-trading in a back room
• Math and physics Ph.D.'s with no investment knowledge building the models

Systematic investing IS:

Studying and implementing traditional investment principles
• Doing so systematically
• Harnessing the power of computers to process vast amounts of data quickly
• Elimination of the human behaviors and influences that can cause poor investment decisions

Because of the reliance of traditional strategies on subjective forecasts and qualitative judgments that are difficult to quantify, few managers can provide the data necessary to determine with a high degree of confidence the source or significance of their edge. Without this information, it is difficult to ascertain whether their investment performance is the result of skill or simply luck.

Today, there have been a small number of boutique firms that introduced ETF rotation strategies to their clients, and this service has recently been embraced by a few large, well-established investment firms that are seeking to retain their clientele who are abandoning their stockbrokers in favor of low-cost, highly diversified, index-based ETFs.


The ongoing transfer of nearly $80 billion per month into passive ETFs has created a significant demand for a way for investors to attain higher performance than the 6% - 8% annual return that is the average for the market. Investors need a systematic approach to select the best, high-performance ETF's at any given time, without making the discretionary decisions that have historically resulted in terrible performance.

Most of all, investors want to avoid the return-destroying losses that a portfolio can experience whenever the market enters into a deep correction or bearish conditions. Many investors are discovering the benefits of a systematic, ETF-rotation alternative to passive, index-based investing. By adding just a small bit of activity and rotating from one passive ETF to another a few times a year, returns can be doubled, tripled, and even more.

The ETFOptimize Strategies oversee the selection of ETFs and determine timing and exposure to the market based on real-time conditions, and provide much higher returns at much lower risk than just buying-and-holding a collection of passive ETFs. ETF-based rotation strategies that add a slight bit of activity (with trades occurring only 2-6 times per year) deliver far better returns than index-based ETFs, but with substantially less risk and very little trading activity.

ETFOptimize has constructed a growing suite of quantitative investment strategies that make exclusive use of passive, index-based Exchange Traded Funds (ETFs). By rotating into the optimum ETF at the optimum time, our strategies turn market downturns or selloffs into profitable opportunities instead of potential calamities, reduce the systemic risk in the market, dramatically increase returns, and help investors achieve their financial goals. Because our systems continuously monitor market conditions, investors can achieve these objectives without having to worry about a disaster like the Financial Crisis of 2008-2009 terminating their retirement plans.


Each week, our Suite of ETF Investment Strategies automatically assess more than two-dozen proven financial market 'tells' with multiple, Wall Street caliber databases to create smooth, high-return investment performance through any kind of market environment – bullish, bearish, or sideways and volatile. Our models utilize sophisticated algorithms that automatically analyze a broad spectrum of financial, market, and macroeconomic data series to make high-probability, systematic decisions about the optimum ETF to hold in a wide variety of conditions. Whatever drama is occurring in the market is irrelevant, because the ETFOptimize strategies produce consistent profits, month after month – year after year.

We know of no other subscription-strategy provider utilizing a comprehensive set of more than 28 macroeconomic signals, as well as multiple market-breadth indicators, revenue, profitability, and many other aspects of the various market segments, sectors and industries to determine the most efficient and profitable choice of ETF to hold at any given time. The few other ETF strategy providers that exist are using simple quantitative approaches that depend on single-factor analysis of a characteristic such as momentum. 

According to David Byron, Founder of the Quantitative Investing Institute, "The sophistication and effectiveness of the ETFOptimize strategies is truly a breakthrough that could revolutionize investing. By incorporating multiple, key macroeconomic and measurements into the strategy engine, ETFOptimize has dramatically increased the accuracy of their trade signals. The result is precision and effectiveness that is groundbreaking."

The quantitative, weekly assessment of conditions by our strategies selects the optimum ETF(s) to hold at any given time while meeting each particular strategy's total return, risk-tolerance, and trading-activity objectives. Transactions take place infrequently, with an average of two to seven months between trades. ETFOptimize adds just the right amount of systematic activity to turn passive, index-based ETF portfolios into powerful performance machines that produce returns that are as much as 10-fold better than a buy-and-hold approach using those same ETFs.


Returns for the ETFOptimize Strategies range from 15% to 35% average compounded growth per year with 100% of all years profitable (57 of 57 total years) across all strategies. On average, max drawdowns are reduced to less than 1/4th of what the overall market experiences across the span of a strategy's long-term performance (sinve inception). When a deep selloff or bear market begins, our systems have already rotated into cash or the optimum defensive ETF, thereby turning the tables and transforming every market downturn into an opportunity to add profits.

As an example of how well our strategies profit during downturns, our Asset Allocation: Optimal Equity and Fixed Income (4-ETF) Strategy (shown below) has never had a losing year and outperformed the market by 48.70% during 2008 (the worst year of the Financial Crisis). When a deep selloff or bear market begins (such as during the Financial Crisis), our trading systems detect the change of conditions early and have already rotated into the optimum defensive position, thereby turning the tables and transforming every market downturn into an opportunity for profits.


Asset Allocation: Equity-Fixed Income (4 ETF) Combo Strategy
Our Asset Allocation: Equity/Fixed Income (4 ETF) Combo Strategy provided an average return of about 28% since inception. See details.


One of the most desirable features of the ETFOptimize strategies is their exceptional performance during market selloffs. Each of our strategies has been designed to mitigate drawdowns as much as possible within the constraints of its approach – and, depending on the strategy, even produce positive returns by turning the tables on bear markets.

The reason that each strategy's approach constrains drawdowns is that some of our strategies (such as our Asset Allocation (2-Asset) strategies) are designed to become more defensive and battle against losses by optimizing the defensive component when the market declines. Because of this, when equities are weak, the defensive ETF takes the lead and is responsible for mitigating losses – and depending on the strategy, even gaining ground as the market descends.

On the other hand, a strategy that is designed to achieve the highest possible return (such as our Optimal Equity Rotation Strategy), does not include a defensive component. The reason for this is that the fixed income component would moderate or even be a drag on the objective of maximum returns when conditions are bullish. For example, our Optimal Equity Rotation strategy garnered an astounding performance of 76% during 2017 – a time when the market was unmistakably in 'bull mode' with the S&P 500 gaining about 20%.

If the strategy had included defensive ETF's during 2017, they certainly would have reduced that exceptional 76% return from the optimal equity ETF's because in 2017. For example, our Optimal Fixed Income Rotation strategy gained just 16.78%. While this is a phenomenal return for investors who need a conservative, stable fixed-income strategy, it would've reduced the Optimal Equity Strategy return to about 46%.

As shown in the chart below, during the Financial Crisis (from January 2008 to November 2010), our Asset Allocation: Optimal Equity and Fixed Income (4-ETF) Strategy produced a 20% return. You can see that beginning in January 2008 the S&P 500 (blue line) began its deep selloff that lasted until March 2009, ultimately dropping -56%. It took until November 2010 for the S&P 500 to recover to the level where it stood in January 2008, i.e., a zero percent return for that period. In the meantime, this strategy produced a return of 100% – doubling the size of your portfolio – while someone invested in the S&P 500 ETF (SPY) was just breaking even after 2.8 years.


Asset Allocation: Equity-Fixed Income (4 ETF) Combo Strategy

During the Financial Crisis, our Asset Allocation: Equity/Fixed Income (4 ETF) Strategy produced a 95% return at a time its 70%-30% Equity / Fixed Income benchmark was breaking-even over the course of 3 full years. See details.

Notice the strategy's (red line) steady climb higher without a significant profit-destroying drawdown, resulting in a total return that is more than 1,000% greater than the S&P 500's performance (blue line). The total return for the strategy during its lifetime from 2006 to present is 1,622.69%. During that time, the strategy turned every $100k invested into more than $1.6 million. The "Asset Allocation: Equity & Fixed Income (4 ETF) Combo Strategy" is just one example of the many choices in our suite of high-performance ETF Investment Strategies, ensuring there's an approach that is perfect for every investor's wealth-building objectives.


We make it effortless for you to accumulate profits with ETF investing.  With the high performance and low drawdowns our strategies provide, why would an investor spend time incessantly seeking the slightest edge to try and beat the market with individual stocks? Or why would an investor allow a mutual fund manager to make repeated money-losing mistakes when you can sit back, relax and await the ETFOptimize signals – while getting much higher returns with much lower drawdowns in the process? By rotating between just a few ETFs a year with two-to-six months between trades, our subscribers are getting returns that on average, are more than TRIPLE the market's performance.

Our model strategies are particularly easy to use for non-professional investors because they hold just 1-4 positions at a time and don't rely on the rapid churning of trades to generate their outstanding performance. While each portfolio is updated and signals are automatically assessed each week to respond to changes in conditions rapidly, rotation of the ETF(s) held in the portfolios occur with an average of 2 to 7.3 months between trades (depending on the strategy). Each approach uses ETFs that are pre-screened for issuer stability and liquidity, allowing them to accommodate any size of a transaction or any size portfolio.

For example, our Asset Allocation: Equity/Fixed Income (4 ETF) Combo Strategy holds positions for an average of 106 days. That combination includes two Equity ETFs being held an average of 66 days (about 3.3 months) while holding the two Fixed Income ETFs an average of 146.75 days (approximately 7.34 months).

The low-cost, ETFOptimize Premium Strategy subscriptions provide you with detailed weekly updates for each strategy. Each strategy page is updated to show precisely the performance the model is achieving, combined with clear trade signals that provide details of which ETFs to buy or sell and when to make your trades to attain the highest returns from each trade.

Learn the secret of turning $10k into more than $300 million as you save for retirement.

See our Suite of ETF-based Strategies


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