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Switcher: noun (/ˈswiCHər/), is a small railroad locomotive intended not for moving trains over long distances but rather for assembling trains ready for a road locomotive to take over, disassembling a train that has been brought in, and generally moving railroad car around – a process usually known as switching (source: Wikipedia).
What is this all about?
We are pleased to announce the launching of a new product the “Global ETF Switcher Strategies” or “ETF Switcher” for short. This product will consist of a series of daily reports with monthly performance summaries and occasional commentary – all based on the rotating selection of various ETF picks from a large group of almost 100 such instruments. The idea and intuition for this kind of strategy belong to the market timing/rotation investment approach. We will offer two kinds of investment information, a global view (where we will assign an “on” or “off” switch to all ETFs in our selected universe) and a group-based pick of what, our methodology tell us, are the most suitable ETFs to invest in for the coming day.
The on/offs list will be reported on the “Switcher View” page and the picks will be reported on the “Switcher Picks” page. All strategies weights and further explanations can be found in the daily .pdf files.
Market timing and rotation strategies have always been popular approaches for systematic trading and there are many different methods for implementing such strategies. Here we follow a coherent methodology that differs from what we have already seen in the academic literature and in various places that discuss market timing approaches. The gist of the method is to rank our universe of ETFs based on a particular characteristic of their returns and from this ranking to produce “on”/”off” signals (for being in or out of the market) and to offer trading recommendations on ETF groups that are defined from all ETFs that we consider.
“Our universe” consists of about 100 ETFs that are selected based on the geographical location they represent and their average volume. We tried to cover all major geographies and markets and to account for ETFs on equities, bonds and cash equivalents, currencies and commodities. In this way we can take advantage of different types of risk and to allow for more flexible selection across the whole universe and the different groups we define.
On the geographical coverage of our approach we have ETFs that are labeled “global” and represent larger areas and/or sectors not tied to a specific country or market; we then have ETFs for the north and south American markets that include the U.S. and Canada, Mexico, Brazil, Chile and Peru; we then have ETFs for Europe but (mainly for data availability) for developed economies: Austria, Belgium, France, Germany, Italy, Netherlands, Spain, Sweden, Switzerland, United Kingdom and from Eastern Europe Poland. Moving on to Asia and the South Pacific we have ETFs that cover China, Hong Kong, India, Indonesia, Israel, Japan, Philippines, South Korea, Taiwan, Thailand and then Australia and New Zealand. Finally, we consider two ETFs on Russia and one on Turkey.
As noted before, the ETFs that belong to this geographical categorization are mostly equity-based ones or sectorial ones (such as financials). We have three more categories /groupings that we consider. We have a group of currency ETFs for the euro, the Australian dollar, the British pound, the Canadian dollar, the Japanese yen, the Swedish krona and the Swiss franc, as well as an ETF on a U.S. dollar index. We then have a group of bond and cash equivalent ETFs and finally we have a group of ETFs on commodities that include ETFs on gold, silver, oil and gas and one ETF on agriculture.
The above ETFs are split in two categories according to their inception date: all ETFs issued before 2007 and all ETFs issued after 2007 (including the first category as well). A more clear picture is given in the appendix at the end of the .pdf documents.
What do the daily reports provide?
The two sections at the beginning offer two different pieces of “advise”. In the first section we provide explicit investment recommendations, by combining the “global view” (from the second section) with ETF rankings.
In Section 1A the “best” ETF is picked in three different strategies using the ETFs issued before and after 2007. For each strategy the “All around” pick is given for those that need to track only one instrument.
In each of these groups the following procedure is followed and reported:
- A selection from the group of bond and cash equivalent ETFs is made.
- A selection from the group of commodity ETFs is made.
- A selection from the group of equity ETFs is made.
In Section 1B we report the weights for each strategy when the bond and commodity are combined with the equity ETF.
In Section 2 we provide the switching signals for our universe of assets. All ETFs are given a market or risk signal, either “on” or “off”: when the signal is “on” it means that investing in this ETF for the next day is a plausible option; when the signal is “off” it means that a recommendation to exit the market is issued. It is important to stress out that this “global view” is not geared towards actual investment in the ETFs but rather it intends to show the “global” conditions as they are quantified with our methodology. So, one could use this information to create a variety of strategies: for example, a possibility would be to invest in the geographical region or group when all signals are “on”. In this way the “global view” becomes a hybrid of both economic and investment information and allows the end user to tailor the signals to her own investment needs. Furthermore, one can track over time how the signals move around the world or across different asset classes.
Disclaimer: The contents of the reports are provided for information purposes only. Any and all recommendations shown in the reports and this website 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 publication are those of the authors alone and are subject to change at any time, and they have no obligation to update the opinions, recommendations or the information in this report or its affiliated website. The authors of the report do not accept any liability whatsoever for any direct or consequential loss arising from any use of the information provided. The information in this report is not intended to predict actual results, which may differ substantially from those presented.