• Brett Schafer

Weekly Backtest #9: Trendy ETFs

*This is a weekly backtest series I started in July 2019. Every week I go through a different backtest to see how a certain portfolio/asset class performed vs. the U.S. stock market. You can check-out this backtest or do your own at portfoliovisualizer.com.

Everyone loves investing in trends. Fintech, SaaS, 3D-printing, the gig economy, it seems like every year we get a new hot topic Wall Street can’t keep their hands off of.

A lot of the time you can invest in these trends through ETFs. While I’ve never been a big factor-based ETF guy (I only buy the broad-market ones for my Roth), I know there are thousands out there for investors to choose from. That is why this week I wanted to test how trend following ETFs have done vs. the broad market.

The portfolio consists of five equally weighted ETFs based on different sectors of the market that were/are popular. OK, let’s get to it.

Portfolios

Portfolio 1

TickerNameAllocationVFHVanguard Financials ETF20.00%VHTVanguard Health Care ETF20.00%VGTVanguard Information Technology ETF20.00%ICLNiShares Global Clean Energy ETF20.00%IGViShares Expanded Tech-Software Sect ETF20.00%

Portfolio 2

TickerNameAllocationSPYSPDR S&P 500 ETF100.00

Performance: 2009 – Present

Since a lot of these specialty ETFs haven’t been around for more than a decade, I had to start the backtest in 2009. This isn’t a particularly long time, and only encapsulates one business cycle, so take from this data what you will.

PortfolioInitial BalanceFinal BalanceCAGRStdevMax. DrawdownSharpe RatioPortfolio 1$10,000$37,137 13.09% 16.02%-24.15% 0.82Portfolio 2$10,000$40,128 13.91% 13.72%-18.07% 0.99

Two things I took away from this backtest:

  1. It was damn tough to beat the market this decade. Compounding at an almost 14% rate, the market has been on fire since 2009.

  2. Betting on a trend through an ETF is probably not wise

Expanding on that last point, I’ve always been skeptical about using an ETF to invest in a market “trend.” The fees on specialty ETFs can be rather costly, which eat into your returns. Trends are also just that, trends. They usually last only a few years before falling out of favor from the market, leaving someone who invested in the whole industry underwhelmed and underperforming the market.

If you want to invest in anything other than an index fund/broad market ETF, it seems like the best option is to just buy individual stocks and stay away from sector-based ETFs.

Disclosure: The author is not a financial adviser, and may have an interest in the companies discussed.


#Stocks #Investing #Trends #ETF #Backtest #Finance

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