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ETF Pairs Trading > AGG/JNK     SPY/SDS     SPY/TLT     QQQ/QID     QQQ/TLT     AGG/JNK     TNA/TZA     TNA/TLT     FAS/FAZ     FAS/TLT

AGG/JNK

quantf research Strategy

Position ETF
Long AGG
Short JNK

Historical Cumulative Return

Performance Evaluation

Statistics Quantf AGG JNK
Average 0.04 0.03 0.06
Volatility 0.04 0.03 0.08
Sharpe 1.09 0.93 0.77
Max 0.02 0.01 0.03
Min -0.02 -0.01 -0.04
Cumulative 0.36 0.28 0.59
Drawdown 0.05 0.05 0.17
Duration 417.00 289.00 505.00
Profit/Loss 1.00 0.98 0.98
Win Rate 0.54 0.53 0.52
Expectation 0.07 0.05 0.04

What is the quantf research ETF Pairs Trading all about?

The quantf research ETF Pairs Trading is a product of quantf research website (www.quantf.com). It provides daily suggestions on ETF pairs trading. The pairs under consideration are: SPY/SDS, SPY/TLT, QQQ/QID, QQQ/TLT, AGG/JNK, TNA/TZA, TNA/TLT, FAS/FAZ, FAS/TLT.

Why are these pairs selected?

We choose pairs that exhibit some short of “contrarian” characteristics to increase their suitability for pairs trading. Our methodology for this type of pairs trading works well with assets with such characteristics and, furthermore, providing you with one selected asset you can always decide what to do with the other one!

What are the differences in the quantf research ETF Pairs Trading Strategies?

The differences in the strategies regard the position. Strategies that include ETFs with highly negative correlation open long and short position simultaneously, whereas strategies that include ETFs with more neutral correlation open a long position only.  For example, the strategy that invests in the SPY/SDS pair opens long and short position simultaneously (buys the first ETF and sells the second), but the strategy that invests in SPY/TLT opens a long position only.

How do I read the quantf research ETF Pairs Trading Strategies table?

In each table there are two lines. Each line represents a position: Long and Short. As mentioned above, each strategy invests in long only and long/short position depending on the correlation of the assets. In summary, here are how the strategies are invested.

  • SPY/SDS: long & short positions
  • SPY/TLT: long only positions
  • QQQ/QID: long & short positions
  • QQQ/TLT: long only positions
  • AGG/JNK: long only positions
  • TNA/TZA: long & short positions
  • TNA/TLT: long only positions
  • FAS/FAZ: long & short positions
  • FAS/TLT: long only positions

How do I read the Historical Cumulative Return figure?

The quantf research Historical Cumulative Return Figure illustrates the cumulative return an investor has by investing in each one of the suggested strategies (including the market portfolio (SPY) that acts as a benchmark). 

What do all the statistics mean?

  • Average: the annualised arithmetic mean return of the respective strategy. The typical investor wishes for large average values.
  • Volatility: the annualized standard deviation of the respective strategy. The typical investor wishes for small volatility values.
  • Sharpe: the ratio of average over volatility. The typical investor wishes for large Sharpe Ratio values.
  • Max: the maximum daily return of the respective strategy.
  • Min: the minimum daily return of the respective strategy.
  • Cumulative: the cumulative return of the respective strategy. The typical investor wishes for large Cumulative values. This is expressed in decimals instead of percentage; e.g. 1.00 instead of 100%.
  • Drawdown: the maximum drawdown of the respective strategy. The maximum drawdown could be simply interpreted as the largest decline in ETF value in percent from a historical peak. The typical investor wishes for small drawdown values.
  • Profit/Loss: the ratio of the arithmetic mean of positive returns over the (absolute value) of the arithmetic mean of negative returns. The typical investor wishes for large Profit/Loss values.
  • Win Rate: the percentage of time that the strategy exhibits positive returns.
  • Expectation: indicator of anticipated performance computed as (1+Profit/Loss)*(Win Rate) – 1.

 

Why are the last 11 periods used?

A fixed rolling window period of 11 past observations is used for two reasons: first, an extensive backtesting indicates that this number is a reasonable one in terms of robustness to alternatives and overall performance and risk management; second, it is meant to account for short-term changes in asset behaviour in a time frame that is consistent with trading strategies suggested elsewhere on quantf research website. One would, of course, get different results from the use of another rolling window 

How often are new ETF Trading Picks suggested?

New signals are provided on a daily basis (US holidays and all other dates where NYSE market is closed are excluded).

What is the source of the data used?

In all computations the data is collected from Yahoo! Finance (finance.yahoo.com). quantf research is not responsible for the accuracy of the data. quantf research does not redistribute the data which are used exclusively for research and information purposes.

What are the ETFs used in these strategies?

Here follows a table of all the ETFs used in the quantf research ETF Pairs Trading product. All descriptions and details are taken from the ETF Database website.

 

ETF Pairs Trading

  • SPY: This ETF tracks the index that measures the performance of the large capitalisation sector of the U.S. equity market. Issued by State Street SPDR.
  • TLT: This ETF tracks the index that measures the performance of U.S. Treasury securities that have a remaining maturity of at least 20 years. Issued by iShares.
  • QQQ: This ETF tracks the index that includes 100 of the largest domestic and international nonfinancial companies listed on the Nasdaq Stock Market based on market capitalisation. Issued by Invesco PowerShares.
  • QID: This ETF tracks the NASDAQ-100 Index (-200%). This ETF seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the NASDAQ-100 Index. Issued by ProShares.
  • AGG: This ETF tracks the Barclays Capital U.S. Aggregate Bond Index. The index measures the performance of the U.S. investment grade bond market. Issued by iShares.
  • JNK: This ETF tracks the Barclays Capital High Yield Very Liquid Index. This index includes publicly issued U.S. dollar denominated, non-investment grade, fixed-rate, taxable corporate bonds that have a remaining maturity of at least one year, regardless of optionality, are rated high-yield (Ba1/BB+/BB+ or below) using the middle rating of Moody's, S&P, and Fitch, respectively (before July 1, 2005, the lower of Moody's and S&P was used), and have $600 million or more of outstanding face value. Issued by State Street SPDR.
  • TNA: The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe and is comprised of the smallest 2000 companies in the Russell 3000 Index, representing approximately 10% of the total market capitalisation of that Index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. This is a bullish ETF. Issued by Direxion.
  • TZA: The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe and is comprised of the smallest 2000 companies in the Russell 3000 Index, representing approximately 10% of the total market capitalisation of that Index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. This is a bearish ETF. Issued by Direxion.
  • FAS: The Russell 1000 Financial Services Index is a capitalization-weighted index of companies that provide financial services. This is a bullish ETF. Issued by Direxion.
  • FAZ: The Russell 1000 Financial Services Index is a capitalization-weighted index of companies that provide financial services. This is a bearish ETF. Issued by Direxion.

References

Thomakos, D. D., Papailias, F. (2013b). Covariance Averaging for Improved Estimation and Portfolio Allocation. quantf research working paper series.

  
F. Papailias - D. Thomakos, (c) 2014
 
 
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Disclaimer: The contents of quantf research (c) website (http://www.quantf.com) are provided for research and information purposes only. Prices, returns, strategy recommendations and all statistical estimates in general shown in this webpage are indicative and the authors are not offering to buy or sell or soliciting offers to buy or sell any financial instrument. The views in this website are those of the authors alone and are subject to change at any time. The authors of this webpage do not accept any liability whatsoever for any direct or consequential loss arising from any use of the information provided. The information in this webpage is not intended to predict actual results, which may differ substantially from those presented.