The following tables illustrate the current holdings of the Combined ETF 2X Model:

So far this month, the model is up 3.3% and that includes interest charges for borrowed funds.

If you have been following my trading, you know that the inclusion of commodity ETF’s is a recent development.  Following are the backtested equity curves for the copper and sugar ETF models.

I am a huge fan of Jack Schwager’s Market Wizards books (this one and this one) and highly recommend them for would-be traders.  There are consistent characteristics of the best traders regardless of the markets they trade.  Click here to read an interview with Jack.

FJP

After more extensive testing, I have determined that the silver ETF should be dropped and the following ETF’s added:

FXE – CurrencyShares Euro Trust

FXY – CurrencyShares Japanese Yen Trust

JCC – iPath Copper ETN

SGG – iPath Sugar ETN

ETF’s are chosen on the basis of working well with my timing algorithm and low correlation with most of the other ETF’s in the model.  Based on the percentages assigned to each ETF, the model has a Calmar Ratio (compound annual growth rate divided by maximum drawdown) of 9.6.  A Calmar Ratio in excess of 2.0 is considered to be very good.  Of course, I have optimized the backtest and don’t expect the same performance going forward.  However, even if the ratio dropped to 5 I would be very pleased.

The following tables detail the percentages allocated to each ETF and the current positions.

If you follow my QLD/PSQ model on Collective2.com you will know that that model is short the Nasdaq (holds PSQ) and therefore lost money today.  However, my Combined ETF 2X Model made money today despite holding PSQ.

FJP

My research indicates that adding ETF’s for Chile (ECH) and Australia (EWA) to my Combined ETF 2X model results in a higher Calmar Ratio (compound annual growth rate divided by maximum drawdown).  Consequently, I have adjusted the percentages of other ETF’s held by the model.

At the end of June, I compared the return of my model with the S&P 500.  In the future, I will also compare the return of my model with a hedge fund index.  One of the most commonly referenced hedge fund indices is produced by the Hennessee Group and can be found here.

FJP

I continuously review my trading methodology and ask myself if there are ways to improve my performance.  My models are based on trend trading ETF’s and using leverage at a 2:1 ratio when going long.  If my models are robust, the more money I borrow the more I will make.  So why not borrow three times my equity instead of two times?

Of course there is a caveat associated with increased borrowing for my models – it results in a larger maximum drawdown. Using leverage at a 2:1 ratio as I have thus far with my new Combined ETF 2X Model, the maximum drawdown based on backtesting and month-end returns is 8.9% which I am comfortable with.  A very quick and dirty estimation of the increase in maximum drawdown which would result from increasing the leverage to 3:1 shows that the maximum drawdown would increase by about 30%.  Thus with a 3:1 leverage ratio for my Combined ETF Model, the maximum drawdown would probably be around 11.6%.  The compound annual growth rate of the model may increase by 40% from 28% to 39%.  Is the increased return worth the increased maximum drawdown?  This is a subjective question and the answer is dependent on each investor’s risk tolerance.  There is also a practical consideration – does the investor have the ability to borrow three times his/her equity?

FJP

PS: I should add that the 8.9% maximum drawdown is based on an optimized backtest and it would therefore be reasonable to assume a higher maximum drawdown at some point in the future.