"Hot Potato" anyone??

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ockham
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Re: "Hot Potato" anyone??

Post by ockham » 08 Dec 2017 18:56

BoomBoom99 wrote:
08 Dec 2017 12:45
Ockham,

Your modified hot potato strategy looks interesting. Please keep posting your experience with your experiment.

I've pondered modifying the hot potato spice myself. I'd like to make it more TFSA friendly, ie; employ tax efficient ETFs so withholding taxes are eliminated. Horizons has four low cost ETFs suitable for this strategy. None of them pay distributions. They are listed below:
Horizons S&P/TSX 60 Index ETF (HXT)
Horizons S&P 500 Index ETF (HXS)
Horizons Intl Developed Markets Equity Index ETF (HXDM)
Horizons CDN Select Universe Bond ETF (HBB)

I'm interested in your thoughts on using these ETFs in the modified strategy.
In principle, I see no reason why you couldn't use Horizon product for a four-fund strategy. A three-fund strategy would be problematic, however, in that no one of the Horizon products you list covers a universe comparable to XAW.

I use BlackRock because (i) its funds have a reasonable daily trading volume (this limits bid-ask spread headache) and (ii) it's very good in updating its funds' performance numbers. The numbers are usually available by mid-morning on the first of the month for the year ended on the last of the immediately preceding month. I don't know how Horizon compares.

The other issue with Horizon, as I understand, is that it charges a swap fee in addition to its management fee. The swap fee may negate much of the hoped for tax advantage of the product. But I say this not really being familiar with Horizon and not having ever held any of its product.

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Re: "Hot Potato" anyone??

Post by ig17 » 08 Dec 2017 19:30

NormR wrote:
08 Dec 2017 15:42
ig17 wrote:
07 Dec 2017 20:34
FWIW, I think it's a mistake to include Canadian equities in the momentum strategy. As I mentioned before in this thread, Norm's Hot Potato strategy is a derivative of Gary Antonacci's Global Equities Momentum strategy (aka GEM).
Well, to be fair, the idea came from a modification of one from one of James Montier's books. I used a version of it in the G&M a couple of years before the publication of Gary's book.
Sorry, Norm. For some reason, I had it stuck in my head that Hot Potato is based directly on GEM.

As an aside, Gary publicized his strategy long before he came out with the book. I mention this just for the sake of being thorough... I don't mean to question your sourcing.

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Re: "Hot Potato" anyone??

Post by ig17 » 08 Dec 2017 19:50

ockham wrote:
08 Dec 2017 09:02
For a Canadian couch potato investor, in my view simplest and theoretically cleanest is a three fund strategy: one broad market Canadian bond fund, one broad market Canadian equity fund, one world excluding Canada equity fund. My idea is to try adding the Hot Potato spice to this three-fund model.
Many argue that the cleanest Couch Potato strategy is to use pure market capitalization. Canadian equities = 3% of the world market, etc. You know the argument so I'm not going to rehash it here.

A more important point:

GEM/Hot Potato is a dual momentum strategy. It combines absolute and relative momentums.

Absolute momentum: stay invested in equities as long as 12 months return is positive

Relative momentum: pick the half of the world market that performed best in the last 12 months

XAW represents ~97% of the world market capitalization. By using XAW instead of two separate ETFs, you are throwing away the opportunities to harvest relative momentum within ~97% of the world market. In other words, you are turning dual momentum strategy into a largely single momentum strategy. It's not the end of the world, but something to be aware of.

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Re: "Hot Potato" anyone??

Post by gsp_ » 09 Dec 2017 07:46

BoomBoom99 wrote:
08 Dec 2017 12:45
I've pondered modifying the hot potato spice myself. I'd like to make it more TFSA friendly, ie; employ tax efficient ETFs so withholding taxes are eliminated. Horizons has four low cost ETFs suitable for this strategy. None of them pay distributions. They are listed below:
Horizons S&P/TSX 60 Index ETF (HXT)
Horizons S&P 500 Index ETF (HXS)
Horizons Intl Developed Markets Equity Index ETF (HXDM)
Horizons CDN Select Universe Bond ETF (HBB)

I'm interested in your thoughts on using these ETFs in the modified strategy.
You didn’t ask me but I figured I’d chime in since I own a few of these products and ockham has already responded. Horizons’s swap based products are designed for tax efficiency in taxable portfolios. Of the 4 products you mention, two(HXT, HBB) save no withholding taxes in more commonly used non swap equivalent ETFs. HXS and HXDM save less or the same in withholding taxes as they charge in swap fees versus XUU and XEF. An investor would be taking on counterparty risk and paying higher overall fees than conventional products, a lose-lose scenario.

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Re: "Hot Potato" anyone??

Post by BoomBoom99 » 09 Dec 2017 13:25

gsp_,

Thanks for your reply. I can't speak for HXDM due to its short history but I see HXS & HXT have broadly outperformed XUU & XIC post fees and expenses. Morningstar shows the following MERs for these ETFs:
HXS = 0.12% XUU = 0.07%
HXT = 0.03% XIC = 0.06%
HBB = 0.17% XBB = 0.33%

What are your thoughts on modifying the International equities constituent to European equities? These are the MERs, again per Morningstar:
HXX = 0.19% XEU= 0.28%

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Re: "Hot Potato" anyone??

Post by gsp_ » 09 Dec 2017 22:14

BoomBoom99 wrote:
09 Dec 2017 13:25
I can't speak for HXDM due to its short history but I see HXS & HXT have broadly outperformed XUU & XIC post fees and expenses. Morningstar shows the following MERs for these ETFs:
HXS = 0.12% XUU = 0.07%
HXT = 0.03% XIC = 0.06%
HBB = 0.17% XBB = 0.33%

What are your thoughts on modifying the International equities constituent to European equities? These are the MERs, again per Morningstar:
HXX = 0.19% XEU= 0.28%
Many things to unpack here.

HXT and XIC track different indices. The 60 has done better than the broad market recently. Same thing with HXS and XUU over its very short existence. Most passive investors prefer the broadest index available. I would attach no importance whatsoever to these products’ recent performance. Sometimes small caps outperform and sometimes they don’t. XIU and XUS offer more direct comparisons if one is so inclined.

It’s important to look beyond posted third party MER numbers when evaluating total costs. For instance XBB’s MER going forward is not going to be anywhere near .33%. Blackrock cut the management fee in May by .21% so its MER after HST since then is .1%. Granted HBB is also at .1% MER now but then you have to add in the .15% swap fee. HXS’s .30% swap fee negates the lost US withholding taxes on traditional US ETFs(15% on 1.9-2% div yield) in a TFSA. HXDM’s MER is identical to XEF’s but its .3% swap fee is higher than the lost withholding of XEF in a TFSA.

I wouldn’t reduce EAFE to just Europe. HXX was just a stopgap until Horizons figured out how to offer a swap based EAFE product. Time will tell if HXDM tracks more traditional EAFE ETFs.

These swap based products serve a specific purpose, I would never consider owning them in tax free or tax deferred accounts. HXT is the only one with a cost advantage but it may only be temporary(Horizons rebates some of the fee for now) and it is very small compensation for taking on counterparty risk.

I would suggest going to the ETF providers’ websites and spending time reading the documents they provide to get a more complete understanding of the products that interest you. A lot gets lost just looking at third party sites even when they avoid posting outright incorrect info.

Sorry to ockham and others for the OT posts.

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Re: "Hot Potato" anyone??

Post by BoomBoom99 » 10 Dec 2017 14:04

At some point one has to ask themselves if their strategy is worth the effort. I ran a timing model back test of the Global Hot Potato strategy using the following ETFs - XEF, XUS, XIU and XBB. The test period was 2015 to end of Nov 2017. The timing model performance was compared to an equal weight model of the ETFs and to Mawer Global Equity Fund returns over the same period. I realize the test period was short due to the life span of two of the ETFs but I was quite surprised the Mawer Fund came out on top, although with more volatility. Perhaps this global equity diversified Mawer fund should be used as a benchmark when comparing performances for the strategy.

Timing Eq Wt Mawer
2015 18.25% 7.72% 21.49%
2016 6.59% 7.34% -0.39%
2017 10.12% 11.41% 19.22%
CAGR 11.90% 11.26% 13.31%
Stdev 10.69% 8.77% 12.02%

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Re: "Hot Potato" anyone??

Post by AltaRed » 10 Dec 2017 18:38

Not sure you can compare a Global Equity Fund with an ETF mix that contains bonds, i.e. XBB. The Mawer Global Equity Fund SHOULD be more volatile and SHOULD have outperformed over that 2 year period.
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Re: "Hot Potato" anyone??

Post by Mordko » 10 Dec 2017 18:55

All these comparisons seem to miss the point by comparing returns. The point is that one is taking more risk by focusing exclusively on a single asset class and/or a single region. Momentum strategies work great. Until they don't.

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Re: "Hot Potato" anyone??

Post by ig17 » 10 Dec 2017 20:05

Mordko wrote:
10 Dec 2017 18:55
All these comparisons seem to miss the point by comparing returns. The point is that one is taking more risk by focusing exclusively on a single asset class and/or a single region. Momentum strategies work great. Until they don't.
GEM backtests show the opposite. Higher long-term returns, lower risk. See the tables in this article.

http://svrn.co/blog/2015/8/2/is-gary-an ... egy-robust

GEM almost doubles the annual return of the world stock index. The comparison understates GEM’s advantage. The strategy achieved higher returns with lower volatility and shallower drawdowns. What volatility GEM experienced tended to be on the upside.
but...
What’s the catch? When the stock market is in a secular bull phase, timing strategies can lag — a lot. Below is a wealth ratio chart of the 12-month stock-bond timing strategy against the market. While the strategy protected against declines in all five major bear markets, it could lag for decades. I don't think many investors understand how extreme the tracking error can get.

However, it is unfair to compare a strategy that is far less exposed to market risk with the stock market. A fairer benchmark is a blend of the average exposures of the timing strategy (though we can't know it ex-ante). On average, the timing strategy was in the market 70% of the time and in bonds 30% of the time. Below is the wealth ratio of the strategy against the 70-30 stock-bond benchmark. The performance looks better, but you can still go decades treading water.

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Re: "Hot Potato" anyone??

Post by BoomBoom99 » 10 Dec 2017 20:16

AltaRed wrote:
10 Dec 2017 18:38
Not sure you can compare a Global Equity Fund with an ETF mix that contains bonds, i.e. XBB. The Mawer Global Equity Fund SHOULD be more volatile and SHOULD have outperformed over that 2 year period.
My apologies I reran the test without XBB in the lineup but forgot to exclude it in my comment. The (almost) 3 year test period results I tabled are the correct ones without bonds in the mix. I was restricted to a 3 year test period due to the age of a couple of the ETFs. I plan to run a longer one, 2010 to current, when I get some time to do so. I will use other comparable ETFs that have a longer life span. Mawer Global Equity's first full year was 2010.

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Re: "Hot Potato" anyone??

Post by ig17 » 10 Dec 2017 20:29

A good back test should include a couple of bull markets and a couple of bear markets. You can't do that with ETFs. You need to use index data.

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Re: "Hot Potato" anyone??

Post by Mordko » 10 Dec 2017 21:36

"GEM backtests show the opposite. Higher long-term returns, lower risk. See the tables in this article."

Common sense beats any carefully crafted backtest every time. And common sense tells me that reducing diversification and limiting yourself to a single asset class increases risk.

If you had any forwardtests, that would be a different story...

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Re: "Hot Potato" anyone??

Post by ghariton » 10 Dec 2017 22:45

I dunno. I've been following SPLV since its inception, but I was never convinced enough to actually buy any units. FWIW, over the last 5 years, SPLV is up a cumulative 73.29 %, while SPY is up 87.00 %. I note that SPLV has a beta of 0.64, so that it is low volatility as advertised. By contrast, the beta of SPY is 1.00, as expected. Is the difference due to dividends? The yield on SPLV is 2.00 %, while the yield on SPY is 1.80 %, i.e. not enough to explain the gap.

Yes, this is a backtest. But it is with actual investable products, one of which I hold, the other I seriously considered -- ex ante, not ex post.

Past performance is not an indicator of future performance, etc., etc. Still, I find this interesting.

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Re: "Hot Potato" anyone??

Post by ig17 » 10 Dec 2017 23:01

ghariton wrote:
10 Dec 2017 22:45
I dunno. I've been following SPLV since its inception, but I was never convinced enough to actually buy any units. FWIW, over the last 5 years, SPLV is up a cumulative 73.29 %, while SPY is up 87.00 %. I note that SPLV has a beta of 0.64, so that it is low volatility as advertised. By contrast, the beta of SPY is 1.00, as expected. Is the difference due to dividends? The yield on SPLV is 2.00 %, while the yield on SPY is 1.80 %, i.e. not enough to explain the gap.

Yes, this is a backtest. But it is with actual investable products, one of which I hold, the other I seriously considered -- ex ante, not ex post.

Past performance is not an indicator of future performance, etc., etc. Still, I find this interesting.

George
It's a different discussion, but low-volatility strategies are supposed to earn their keep in bear markets, when they experience lower drawdowns. We haven't had a bear market in a long time, so it's not surprising that SPLV has been lagging.

Also, low volatility factor used to be a proxy for value factor. That relationship got broken when low volatility strategies became the fad of the day and attracted billions of new dollars from bond refugees.

(For some reason, I feel compelled to defend these quant strategies, even though I don't use them myself)

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Re: "Hot Potato" anyone??

Post by BoomBoom99 » 11 Dec 2017 02:42

ghariton wrote:
10 Dec 2017 22:45
I dunno. I've been following SPLV since its inception, but I was never convinced enough to actually buy any units. FWIW, over the last 5 years, SPLV is up a cumulative 73.29 %, while SPY is up 87.00 %. I note that SPLV has a beta of 0.64, so that it is low volatility as advertised. By contrast, the beta of SPY is 1.00, as expected. Is the difference due to dividends? The yield on SPLV is 2.00 %, while the yield on SPY is 1.80 %, i.e. not enough to explain the gap.

Yes, this is a backtest. But it is with actual investable products, one of which I hold, the other I seriously considered -- ex ante, not ex post.

Past performance is not an indicator of future performance, etc., etc. Still, I find this interesting.

George

Your 5 year performances are price only. The following are 5-Yr cumulative total returns:
SPLV = 94.24%
SPY = 106.96%
Mawer U.S. Equity = 128.89%
Mawer Global Equity = 117.78%

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Re: "Hot Potato" anyone??

Post by ig17 » 11 Dec 2017 07:55

BoomBoom99 wrote:
11 Dec 2017 02:42
Your 5 year performances are price only. The following are 5-Yr cumulative total returns:
SPLV = 94.24%
SPY = 106.96%
Mawer U.S. Equity = 128.89%
Mawer Global Equity = 117.78%
Apples and oranges.

SPLV and SPY are priced in USD. Mawer funds are priced in CAD; they got a boost from the falling CAD.

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Re: "Hot Potato" anyone??

Post by ig17 » 11 Dec 2017 08:09

Mordko wrote:
10 Dec 2017 21:36
Common sense beats any carefully crafted backtest every time. And common sense tells me that reducing diversification and limiting yourself to a single asset class increases risk.
Common sense tells me you shouldn't dilute your portfolio with 20-40% bonds when stocks markets go on a once-in-a-generation bull run. Common sense also tells me you shouldn't hold onto 60-80% equities and ride them down 30-50% in a bear market.

GEM strategy is not diversified in the traditional sense ("hold all asset classes at the same time"). It relies on a different concept of diversification: diversification across market cycles. It uses the same asset classes, but attempts to own the best asset class for the current market conditions.
Mordko wrote:
10 Dec 2017 21:36
If you had any forwardtests, that would be a different story...
Please share your forward tests for a conventional balanced portfolio.

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Re: "Hot Potato" anyone??

Post by ghariton » 11 Dec 2017 12:49

ig17 wrote:
10 Dec 2017 23:01

It's a different discussion, but low-volatility strategies are supposed to earn their keep in bear markets, when they experience lower drawdowns. We haven't had a bear market in a long time, so it's not surprising that SPLV has been lagging.
Yes, in bear markets I would expect SPLV to out-perform SPY. But then I would expect bonds to out-perform both. Which brings up the question: If I really believe that lower volatility will boost returns, why not simply increase my fixed income allocation? This has been known to work -- occasionally -- in both bear and bull markets.

As you say, low volatility funds (and, I presume, value stocks) have drawn a lot of funds from "bond refugees", I suspect that this has given a strong boost to the returns of low-volatility ETFs and equities. The question then is, whether such a boost can be repeated in future, or whether we will see a return to lower returns that are more commensurate with the amount of risk taken. To my mind, that is an illustration of the caution that must be used with back-tests -- it's hard to know whether the results were affected by non-repeatable factors.
(For some reason, I feel compelled to defend these quant strategies, even though I don't use them myself)
:lol:

More fun than simply buying and holding a widely diversified index fund -- even if I limit these alternative strategies to my play money.

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Re: "Hot Potato" anyone??

Post by twa2w » 05 Jan 2018 18:33

Any updates for Jan 1 from any of the brave??. :D

Just in the middle of Antonacci's book - dual momentum. -Quite interesting

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Re: "Hot Potato" anyone??

Post by ig17 » 05 Jan 2018 19:00

I read the book in 2015. I am still procrastinating. :wink:

My thinking is, the closer we get to the top, the more urgent it becomes to adopt the strategy. Downside protection is a particular strength of the strategy. See the blog post below. It examines GEM performance in overvalued markets (CAPE > 30).

http://investingforaliving.us/2017/10/0 ... 0-edition/

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Re: "Hot Potato" anyone??

Post by ockham » 05 Jan 2018 19:25

twa2w wrote:
05 Jan 2018 18:33
Any updates for Jan 1 from any of the brave??. :D

Just in the middle of Antonacci's book - dual momentum. -Quite interesting
Me, been waiting for BlackRock's official year-end performance numbers. Not yet available. Just one of the glitches that makes real-life/real-time implementation differ from back-testing.

That said, my preliminary numbers have XEF's 12 month return as of Dec 31 besting XUS and XIU (and XAW) by a fair margin. So I anticipate that no change is needed. I'll report here when BlackRock does, hopefully early next week.

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Re: "Hot Potato" anyone??

Post by BoomBoom99 » 05 Jan 2018 19:51

Me, been waiting for BlackRock's official year-end performance numbers. Not yet available.
I've always found Morningstar's performance numbers to be prompt and accurate. They show the following 2017 TR's:
XEF= 18.18%
XUS= 13.57%
XIU= 9.58%

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Re: "Hot Potato" anyone??

Post by ockham » 08 Jan 2018 11:09

BoomBoom99 wrote:
05 Jan 2018 19:51
Me, been waiting for BlackRock's official year-end performance numbers. Not yet available.
I've always found Morningstar's performance numbers to be prompt and accurate. They show the following 2017 TR's:
XEF= 18.18%
XUS= 13.57%
XIU= 9.58%
BlackRock's numbers for 12 months ended Dec 31 are available this morning. Differ a bit from Morningstar (49 bps for XEF, only 1 bp for XIU):
XEF 17.69
XUS 13.35
XIU 9.57
XBB 2.34

I've held XEF since beginning of July. Will continue to hold.

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Re: "Hot Potato" anyone??

Post by BoomBoom99 » 08 Jan 2018 13:41

BlackRock's numbers for 12 months ended Dec 31 are available this morning. Differ a bit from Morningstar (49 bps for XEF, only 1 bp for XIU)
I wonder if the difference is reflected in the date they use for applying the dividends. Some use paydates (which I prefer), others use ex-div dates. I'm pretty sure Blackrock uses the latter and think Morningstar uses paydates. Each to their own I guess. At least both sources include price+dividends in their performance numbers. Google only gave price returns.

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