ETF Basket Trader, 06/08/08

The idea for the ETF Basket Trader began during a chat with Brett Steenbarger about relative value trading systems.

The system trades a basket of nine sector ETF’s long and short. The ETF’s The following equal-weighted basket of Vanguard sector ETF’s is used in the system. Each ETF was traded under identical rules.
  1. Technology
  2. Financial
  3. Energy
  4. Industrial
  5. Health Care
  6. Consumer Staples
  7. Consumer Cyclical
  8. Materials
  9. Utilities
System results for 1/1/2006 thru 6/6/2008 were: The results for 2004 – 2006 are not as high (9% annual return, Sharpe 1.04). ETF data is not available prior to 2004.

Complete results can be downloaded here (pdf).

Systems that trade like this (+17% unlevered returns, 4% drawdowns, etc) revert to the mean – the trick is to to create a good on-off mechanism (this system shows a hint of volatility correlation) and to use control charts to closely monitor system behavior.

Henry Carstens
Vertical Solutions