What About Market Timing with Exchange Traded Funds?

Last time we cover the fact that one of the problems with market timing and mutual funds is the fact that the mutual funds companies have gone out of their way with Early Redemption Fees (ERF's) and minimum holding periods to make it difficult for investors to move their own money around as they see fit, with minimum holding periods of 1-6 months as very common.

Of course, with Exchange Traded Funds (ETF's), this restriction disappears almost completely. The only limitation on your trading frequency becomes the commissions that your are paying your broker, and the bid/ask spread that the more thinly traded ETF's may have. But certainly, if you are averaging a trade no more than every few weeks or months, then these become insignificant.

At Fundztrader we don't offer our own market timing signal yet, but we did take a look at some of the options that are available. One of the most popular is the Timing Cube. This service has been offered for several years, and it has done a good job of getting out of the market when the risk is high. It only trades 2-4 times a year, so it looks like a great candidate for use with our ETF selections.

The Timing Cube trades themselves have not done as well recently, but I suspect that's because it is designed to catch trends in the major market indexes, and the years 2004 to 2006 have not had a lot of trends either up or down. But, as we pointed out in our early mailings, there's always a bull market somewhere. And our fund ratings are designed to smoke them out.

So we tested a very simple system. On a Timing Cube buy, we buy the top 4 ETF's as ranked in our daily rankings. We simply hold those same top 4 funds until the Timing Cube sell, at which point we sell them and go to cash. We wait for the next buy signal, and do it over again.

Testing this system over the 5 years 2001-2005 shows these results:

ANN Rtn Max DD
Timing Cube (Long Only NASD Comp) 14.6% 14.9%
Fundztrader ETF system 18.6% 36.2%
Timing Cube with ETF rankings 25.5% 19.3%


MaxDD is maximum drawdown, Ann Rtn is the annualized return.

As you can see combining these two systems results in quite impressive performance, not only reducing the drawdown of the ETF system but improving the overall return as well.

Now we need to note that these are backtested results, but we did just use the unmodified ETF rankings we developed for our system, and the Timing Cube signals are the real time signals they published. We did no further optimization, just combined the two as they existed.

Obviously, we can't publish this system directly, since that would be the same as us publishing Timing Cube's signals, and they wouldn't take too kindly to that. But you can subscribe to Timing Cube, and use our ETF rankings to basically follow that system.

To subscribe to Timing Cube, go to

http://fundztrader.com/timingcube

If you have already signed up for access to our trades, then you can see the current rankings for our ETF's at

http://fundztrader.com/members/etf_rankings.php

Otherwise you can sign up for access at

http://fundztrader.com/amember/signup.php


Next we will cover Short Term Market Timing.