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.
The Two Traditional Investment Approaches
First, let's define the two distinct approaches that have historically been used by investors:
1) Discretionary investing (also called 'traditional' or 'fundamental'), 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 investment selection and timing.
2) Systematic investing (commonly associated with the terms 'quantitative,' 'quant,' or 'rules-based'), is an approach where the investor uses computer models to operate an automated, data-driven, and consistently repeatable method to select investments, with the capability of reviewing a multitude of different securities and using many parameters or 'factors' to drive its security selection and timing decisions.
The discretionary investing approach relies on an investor's or analyst's experience and knowledge to determine which investments are most appropriate for different conditions. Because assessable, inexpensive computer capabilities simply did not exist for investors prior to the early 1980s, the Discretionary approach was an investor's only choice - and because it was so deeply imbedded in the culture, it still remains how the majority of funds are invested today. However, that status is rapidly changing as investors are moving vast amounts of money from active, discretionary approaches into passive and systematic investment approaches.
One reason for this is that mutual fund managers, which have historically made decisions about the vast majority of investor's funds, for the most part are discretionary investors. HowThe discretionary investor was required to constantly monitor financial markets and investment-related news, mentally juggling thousands of possible factors that might affect their investments. These investors had to know how these factors were likely to impact their portfolio, then make changes to their holdings to meet their goals as market conditions fluctuated. Most importantly, a discretionary manager relies on their judgment as the final determinate of the portfolio's positions and market exposure. As most know, judgments are subjective decisions; i.e., one man's trash is another man's treasure,.
Limitations: There are at least two major limitations to Discretionary Investing; 1) humans have limited capacity to simultaneously contend with the superabundance of complex factors affecting financial assets, and 2) human judgment is subject to behavioral errors, inconsistency, emotional bias, and other psychological and subconscious challenges that in hindsight, generate irrational choices that lose money.
The average investor only attains a return of 2.6% over periods of 10 years or more. Using a systematic approach, the ETFOptimize strategies achieve an average annual return of 26.79%. Source: Dalbar, Inc.
Furthermore, when markets get turbulent and the the speed of change quickens to an exasperating level, Discretionary Investors must grapple with fast-paced, limited information to make subjective and often risky decisions that often go wrong. Evidence of this is demonstrated by the long-term, average performance of discretionary investors. According to MorningStar, while the S&P 500 index has an average, long-term real annual return of 6.96% (including dividends), the average individual investor only achieves a long-term return of 2.6% – 63% less than an effort-free, buy-and-hold approach using the S&P 500 ETF!
This is the reason why so many are turning to passive ETF investing as their approach of choice for long-term savings goals. However, in this article will show you that by adding just a bit of activity to passive investing – with just 3-4 trades a year, – you can quadruple your annual return. In fact, we have a separate article that shows how an 'average investor' can attain an estate of $463 million upon retirement.
The Beneficial Impact of Technology on Investing
Over the last 30 years, there has been an exponential improvement in computing power, rapid development of sophisticated analytical software, and significant new thresholds achieved in the accuracy of a vast number of econometric and financial databases. These strides have led to tremendous advances in the fields of investment research and money management. As a result, quantitative investment strategies have become dramatically more effective and are now being embraced by investors at all experience and skill levels – from beginners to the top echelon of financial professionals.
Systematic investment strategies provide an instantaneous analysis of thousands of data points for thousands of potential investments. Our Premium ETFOptimize Investment Strategies utilize this robust multitude of data points to determine the most profitable ETF to own at any given time. Our algorithmic systems simultaneously assess more than two-dozen different macroeconomic, internal-market, and fundamental-stock data series. It would literally take an individual several weeks to collect, analyze, assess, and calculate this army of data points to arrive at a single investment choice, while it takes our servers a few seconds to perform the same procedure (with far more consistency and accuracy).
The algorithms that ETFOptimize use to make these decisions for the models in our Premium ETF Investment Strategy Suite were built by professionals with more than five decades of collective experience in the investment markets and quantitative approaches. Then, after each component of a strategy is carefully crafted, it is back-tested, forward-tested, stress-tested, robustness-tested, out-of-sample tested, stress-tested, then tested again and again before being considered as a viable addition to our Investment Strategy Suite.
Another significant advantage of a systematic investment strategy is that the algorithms are never influenced by common human behavioral challenges – both physical and psychological – matters of fatigue, time limitations, family problems, stress, over-enthusiasm or under-enthusiasm, mood swings, hopes, fears, or the investment decision-maker simply having a rotten day. Instead, our servers coldly, efficiently, and effectively perform their calculations whenever required and with nary a complaint.
The other very important part of the ETFOptimize product is Exchange Traded Funds (ETFs). Systematic investing can be applied to individual stocks, but the benefits are nothing like they are when using systematic investing with ETFs. It's almost as if quantitative investing and ETFs were made for one another. Please allow me a moment to explain how we use ETFs with systematic strategies…
The Advantages of Using Exchange Traded Funds (ETFs)
Our quantitative strategies make exclusive use of Exchange Traded Funds (ETFs) as the investment vehicle of choice. Not only are ETFs the overwhelming choice of today's investors with more than $1 trillion being added to the group each year, they are also uniquely appropriate for use in systematic investment strategies.
ETFs are a collection of dozens, hundreds, or even thousands of the individual stocks included in a market index, thereby providing wide diversification in a single asset. For example, the Technology Select Sector SPDR Fund (XLK) holds capitalization-weighted investments in approximately 70 different technology-related companies, such as Apple (AAPL), Microsoft (MSFT), Alphabet (GOOG), Facebook (FB), Intel Corp. (INTC), Cisco Systems (CSCO), etc. However, the ETF also holds lesser-known companies, such as XiLinks (XLNX) - a $2.54 billion (sales) semiconductor equipment company, or Synopsys (SNPS), a $2.84 billion (sales) company providing electronic design automation software products.
XLK has approximately $20 billion in assets and represents the technology sector – one of nine major sectors – of the S&P 500 index (SPY), which is the most widely utilized market index, containing 80% of the capitalization of the market. Purchasing XLK is an investment in all of these top-tier, fast-growing companies that represent classic American innovation.
Unlike individual stock investing, these broad indices do not require nuanced, subjective judgments, such as assessing of the capabilities of one particular management team compared to another. Also, because they represent broad segments of the market that correlate to macroeconomic analysis, systematic strategies function more effectively with ETFs. For example, if we identify that the business cycle is just beginning an expansion, we know that the Consumer Discretionary sector – represented by the Select Sector SPDR ETF (XLY) – is likely to have favorable tailwinds.
Most of the decisions related to choosing a particular market segment, sector, industry, or country over another are derived by top-down analysis or price-pattern analysis. Systematic investment systems are usually superior to individual human judgment when making top-down assessments and price-pattern assessments. For these reasons and more, ETFs are particularly appropriate for use with quantitative investment strategies.
Quantitative, rules-based strategies eliminate the all-to-human behavioral biases that can cause losses, or at the very least, inconsistency in an individual's results. However, systematic investing has been misunderstood by some investors to be something it is not. Let's clarify a few of them:
Misunderstandings About Systematic Investing
Systematic investing with ETFOptimize is NOT:
• Money Managers making discretionary investment decisions and repeating their terrible track record;
• High-Frequency Trading or HFT (our strategies make trades with an average of 3.85 months between transactions);
• Vast numbers of computers robo-trading in a back room somewhere;
• Math and physics Ph.D.'s with no investment knowledge building the models.
Systematic investing with ETFOptimize IS:
• Implementing traditional investment principles;
• Doing so systematically;
• Harnessing the power of state-of-the-art computers to process vast amounts of data quickly;
• Including more than 28-different financial data series to provide robust signals;
• Elimination of the human behaviors and influences that can cause poor investment decisions;
• Investors / Systematic Strategy Designers with a combined 50+ years of experience building the strategies.
Confidence-Inspiring, Exceptional Performance
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.
An Innovative Improvement to ETF Investment Approaches
Every week, each of our Strategies in the ETF Investment Strategy Suite automatically assess more than two-dozen proven financial market 'tells' with multiple, Wall Street caliber databases to provide our subscribers with signals that, over time, 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.
Performance of the ETFOptimize Systematic Strategies
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 th hi Christina, how is Sierra doing? Any better?e 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 money-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.
You can see from the chart below that our Asset Allocation: Equity/Fixed Income (4 ETF) Combination Strategy produced consistently steady gains that average 30% per year since its inception in 2006, regardless of how the underlying stock market was performing:
You can sign up to put this strategy to use for you for just $19.95 per month! Click here to review the details of this and our other ETF-based investment strategies.
Strategy Performance During the Financial Crisis
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 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 benchmark (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.
Notice how the strategy (red line) steadily climbs higher without a significant profit-destroying drawdown, resulting in a total return that is more than 1,000% greater than the benchmark (S&P 500/Fixed Income combination) 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.
Simple and Easy
We make it effortless for you to accumulate steady profits with ETF investing. Considering 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 using 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.