Monthly ETF Rotation System Rules & Results – $SCHH, $IYR, $TLO, $SPY

As some of you know, I recently began trading two monthly ETF Rotation Systems.  One is a Basic ETF Rotation system that trades a diverse group of markets and the other covers similar markets using Schwab Commission Free ETF’s.  The Basic System is intended to take the place of the ETF Portion of the Donchian Channel System while the Schwab System is being traded in one of my retirement accounts.  The Donchian system is still being traded on a few Forex pairs.

This post covers the December results for both systems and provides a little more information on the rules and markets traded.


December was a good month for the Schwab Commission Free Rotation system, which held positions in Long Term U.S. Treasuries and Real Estate ($TLO and $SCHH).  The Basic Rotation System was invested in Real Estate and the S&P 500 ($IYR and $SPY) and didn’t perform quite as well.

The hypothetical monthly return for the Schwab system was 2.73% while the Basic System had a hypothetical return of 0.27%.  Hypothetical returns are calculated using adjusted close data from Yahoo Finance and applied to a $10,000 initial account balance.  The Schwab ETF Rotation system has been traded a month longer the basic system and, as a result, has an additional data point in the equity curves below.

12.31.14BasicEquitySchwab Commission Free ETF Rotation System Equity

For the month of January 2015, the Schwab system is holding Real Estate and Global Real Estate ($SCHH and $RWO). The Basic system is holding Real Estate and U.S. Small Cap Equities ($IYR and $IWM). The full January rankings for both systems are shown in the Market Momentum Newsletter.

Information regarding actual positions, historical rankings, and hypothetical equity for both systems is being maintained on the following two pages:

Basic ETF Rotation System Results

Schwab Commission Free ETF Rotation System Results

ETF Rotation System Trading Rules:

I haven’t dug too deeply into the specific rules for the ETF Rotation Systems so they’re being presented here for your reference.  I backtested the systems using ETFReplay and designed them to fit with my comfort level.  If you plan trade an ETF Rotation System, I highly recommend using a tool to backtest and design a system to fit with your comfort level.  In order to be successful with any system, it’s essential that it fits with your personality.  I know that might seem like some sort of touchy, feely nonsense, but it isn’t.  Trust me . . . or don’t.

Monthly ETF Rotation System Trading Rules:

  1. On a monthly basis, rank and order the ETF’s for each system using the 3 month total returns.  The two ETF Rotation System portfolios are presented below.
  2. Invest 50% of desired equity in the top 2 ETF’s if price is trading above the 6 month (120 day) simple moving average.  For example, if a $10,000 account was going to commit to two positions and invest 100% in the system, each positions would be $5,000.  If only one ETF is trading above the moving average, hold the other position in cash or $SHY.
  3. Ignore price fluctuations during the month and rank again at the end of the month.

Basic ETF Rotation System Markets:

Basic ETF Rotation SystemDescriptionMarket
AGGiShares Core Total US Bond (4-5yr)US Bonds
TLTiShares Barclays Long-Term Treasury US Bonds
BWXSPDR Barcap Global Ex-U.S. BondInternational Bonds
PCYPowershares Emerging Markets Bond (7-9 yr)International Bonds
EEMiShares MSCI Emerging MarketsEmerging Markets Equity
EFAiShares MSCI EAFEInternational Equity
VEUVanguard FTSE All-World ex-USInternational Equity
DJPDow Jones-AIG Commodity IndexCommodities
GLDSPDR Gold SharesCommodities
IWMiShares Russell 2000 Index FundUS Small Cap Equities
SPYSPDR S&P 500 IndexUS Equities
VNQVanguard MSCI U.S. REITUS Real Estate

Schwab Commission Free ETF Rotation System Markets:

Schwab Commission Free ETF Rotation SystemDescriptionExposure
SCHBSchwab US Broad Market ETFUS Equities
SCHASchwab US Small CapUS Equities
PGXPowershares Preferred PortfolioUS Preferred Stock
SCHFSchwab International Equity ETFInternational Equities
SCHESchwab Emerging Markets EquityInternational Equities
SCHCSchwab International Small Cap EquityInternational Equities
SCHHSchwab US REIT ETFReal Estate (US)
RWOSPDR Global Real Estate ETFReal Estate (International)
SCHZSchwab Aggregate Bond ETFUS Bonds
SCHRSchwab Intermediate Term Treasury ETFUS Government Bonds
TLOSPDR Barclays Long Term Treasury ETFUS Government Bonds
HYMBSPDR S&P High Yield Municipal Bond US Municipal Bonds
SCHPSchwab US TIPS ETFUS Government Bonds
PCYPowershares Emerging Markets Sovereign Debt PortfolioInternational Bonds
BWXSPDR Barclays International Treasury Bond ETFInternational Bonds
USCIUnited States Commodity Index Commodity
SGOLETFS Physical Swiss Gold SharesCommodity

Feel free to email me or leave a comment below if you have any questions about the systems.

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  • kapil1022

    Hi Dan, nice work on the etf rotation system. I have two questions, first, shouldn’t the systems be in the same sectors every month to be consistent? Second, why do we need two systems? Non Schwab customers can buy the Schwab etfs anywhere for the same commission as the non-Schwab efts. There is no advantage to the non-Schwab etf portfolio that I can see. I would rather see a second system that uses different parameters ie 12 month performance or something like that.
    Thanks, kapil

    • Thanks Kapil. The reason that the sectors don’t always align perfectly is due to granularity and total returns. Initially, I thought the systems would probably line up, but that isn’t always the case. The Schwab system has a little more granularity and that can lead to slightly different ETF’s than the Basic system. Regardless, the same markets are in the top performers, but when you go through the total return ranking things don’t always line up. Does that answer your question? If not, let me know.

      The reason for the Schwab system is purely selfish. I have some retirement accounts at Schwab and I wanted to be able to use a rotation system there without paying commissions. That being said, Schwab has some good ETF’s and the fees are low.

      Thanks again and let me know if that raises any new questions.


      • kapil1022

        Thanks Dan. Have you tested other timeframes? It would be interesting to see how they do?

        • By other timeframes do you mean lookback periods for ranking the ETF’s or timeframes to rank and rotate (as in weeks or days, rather than monthly)?

          I did test various lookback periods for ranking the ETF’s and found that a 3-6 month period for ranking produced similar results. I chose 3 months largely because I wanted the system to be more sensitive to changes and rotate out more quickly, which is just my personal preference coming through. I didn’t test a shorter term version of the system that would take positions more frequently than on a monthly basis because I wanted something that I could run in a retirement account with a minimal amount of involvement. Hope that helps.


          • AYA

            Hi Dan,

            Do you always trade on the same day of a month? Suppose, market crashes soon after the last re-balance and your current allocation quickly gets out of whack. Any contingency plan for this?

            Just imagine sitting on your hands the rest of the month, waiting patiently for the next re-balance date, amidst the market turmoil! Oct’1987 or May’2010 or Aug’2015 are good examples of rapid price drops without early warning:-(

            Thanks in advance.

  • Rich Durham

    Agree that 3 months is a good choice for lookback period. Just starting out with an ETF rotation and using a one week rotation period with a deadband (engineering speak); pick the top three but don’t trade until an ETF drops to the 5th position.

    • Nice Rich, thanks for sharing! Deadband is a new term for me. Right now it just conjures up images of little multi-colored bears dancing . . . who knew it could be so much more serious?!

      I think your idea about holding an ETF until it falls out of the top 5 ranking is interesting. I’m not sure how I could test it without getting a huge excel file together, but I like the idea. Please follow up and let me know how the system performs.