KISS Low Volatility Rotation

The rotation strategies that I've introduced so far have been monthly, top1, 3-month momentum, no volatility weighting strategies. Let me explain: the usual variables for backtesting rotation models are frequency of rotation (e.g. weekly, bi-monthly, monthly, quarterly), asset quantity (e.g. invest in the top1, top2 or top3 performers at a time), momentum look-back period (e.g. x-months or x-days) and volatility (e.g. x-months or x-days).

The 3-month period momentum has worked well with various models, backtested over the last 10 years. This isn't to say though that in the future another look-back period wouldn't work better. In the interest of diversifying the look-back period and also including asset volatility in the mix (which often lowers the CAGR but also lowers the Max DD, making the strategy less volatile) I want to introduce a few other strategies, which may have not performed quite as well as some of the other strategies I've previously presented, but may or may not outperform the other strategies in the future.

First up is "KISS Low Volatility Rotation". I named it as KISS (keep it simple stupid), since rather than a big basket of ETFs, it only invests in either SPY (SPDR S&P 500 ETF) or TIP (iShares Treasury Inflation Protected Securities Bond ETF). If neither asset performs as well as holding cash, the model will rotate into cash or cash proxy SHY (Barclays 1-3 Year Treasury Fund). The return over the last 10 years has been a lot better than just holding the US total market (279% vs. 127% total return). The momentum look-back period is divided into two different look-back periods, and asset volatility is also taken into account, all with their own weightings. The CAGR is around +14%. Though quite a bit lower than in other strategies I've presented in previous posts, the Max DD is only around -13%, which is one of the lowest I've seen in models backtested for this long a period.

This strategy is very easy to implement for free, perfect if you don't prefer to deal with Excel sheets I've provided for other strategies or don't have access to the TOS platform.

Clicking on this link takes you to the ETF Relative Strength Backtest section of ETFreplay.com,
where you plug in the info from the screenshot below: First ETF: "SPY", Second ETF: "TIP", Update Schedule: "Monthly". You can select the backtest to start in "2004" if you want to see in detail how the strategy has performed. ReturnA: "6-months" (Weight: 60%), ReturnB: "36-months" (Weight: 10%), Volatility: "20-days" (Weight: 30%). At the beginning of each month you come back and check what the new asset is, for November it is "SPY" (scroll down to the bottom of the page and you see the signal was issued on Oct 31, 2014).