Are Trading Rules Profitable in Exchange-Traded Funds?

Transcription

1 Technology Invesmen, 11, 2, doi:.4236/i Published Online May 11 (hp:// Are Trading Rules Profiable in Exchange-Traded s? Absrac Terence Tai-Leung Chong 1, Elon Hei-Tung Li 2, Kenneh Tak-Kan Kong 2 1 Deparmen of Economics Hong Kong Insiue of Asia-Pacific Sudies, The Chinese Universiy of Hong Kong, Hong Kong, China 2 Deparmen of Economics, The Chinese Universiy of Hong Kong, Hong Kong, China [email protected] Received March 1, 11; revised April 28, 11; acceped May 4, 11 The Exchange-raded fund (ETF) is a burgeoning financial vehicle. Despie is growing imporance, here has been a lack of empirical sudies on he profiabiliy of echnical rading rules in he ETF marke. This paper assesses he profiabiliy of he On-Balance Volume indicaor () on ETF rading. I is found ha he rading rules associaed wih he are able o generae hsome reurns in he ETF marke. This is in conras o he convenional wisdom ha funds should be bough held. Keywords: On-Balance Volume, Exchange-Traded s, Moving Average 1. Inroducion A wide variey of nascen financial vehicles have been developed in recen years. In paricular, he Exchangeraded fund (ETF), among oher financial innovaions, has become a burgeoning financial vehicle gained he aenion of he populace. ETFs have a relaively shor hisory. The world s firs ETF was launched in 1993, wih a oal asse value of US $484 million. By he end of, here are over 00 ETFs raded on US exchanges, wih a oal asse value of more han US $790 billion, reflecing a growing dem for his new financial vehicle. 1 Compared o muual funds, ETFs offer have a variey of advanages, such as a greaer flexibiliy, lower fee, increased ax efficiency greaer ransparency [1]. 2 Tradiional performance merics, such as Price/Earnings raio cash flow, canno be applied o rade ETFs [2]. This paper examines a opical research area. Following Tsang Chong [3], we evaluae he performance of he On-Balance Volume () indicaor in he ETF marke. The is a simple indicaor defined as: 1 V, C>C 1 1 V, C<C 1 1, C C 1 where C V are he closing price rading volume 1 The exac number of ETFs depends on he definiion employed, as here are many oher ETF-like producs lised in differen exchanges [1]. 2 For recen sudies on ETFs, see [4] [5]. respecively a ime. We le 0 o be zero. A rising price ogeher wih a rising indicaes ha he volume is heavier on up days, confirming he uprend of he marke. If prices are moving higher while he volume is falling, i suggess a rend reversal. 2. Daa Mehodology Our sample includes 30 US lised ETFs 3 from six differen caegories, namely, Bear Marke, Lain America, Telecommunicaions, Consumers Saples, Bond Governmen Treasury Bills. 4 Following Tsang Chong [3], we employ he rading rules associaed wih he indicaor. 5 Five rading rules are sudied. The firs four rules are based on he crossing of is n-day moving average, which is defined as: MA n 1 n n i 1 i A rading signal is produced when crosses he corresponding moving average. The fifh rule is based on he crossing of wo moving averages. The five rules are defined as follows: 3 According o he definiion of Morning Sar, ETFs ha mainly hold US Treasury Bills are caegorized as Shor Governmen, Inermediae Governmen Long Governmen. In our analysis, we define US Treasury Bills caegory as any ETFs falling ino hese hree caegories. 4 These classificaions, excep for US Treasury Bills, are se by he ETFs corresponding issuers. 5 We derive he indicaor using he rading volume of he ETFs, insead of he rading volume of he underlying asses. Copyrigh 11 SciRes.

2 130 T. T.-L. CHONG ET AL. Rule 1: -day Buy a day : Sell a day : Rule 2: -day Buy a day : Sell a day : Rule 3: -day Buy a day : Sell a day : Rule 4: 0-day Buy a day : Sell a day : The fifh rading rule, which is based on he crossing of -day MA -day MA, is defined as follows: Rule 5: MA Buy a day : MA MA Sell a day : MA MA For he firs four rules, a long posiion will be aken if rises above he corresponding MA, liquidaed when falls below he corresponding MA. The choices of he four window lengh n =,, 0 are common (Brock e al. [6], Tsang Chong [3]). If a smaller value of n is used, here will be many noisy signals. For long-erm invesmen, one may use a larger value of n o reduce he number of ransacions. We prohibi shor-selling consecuive buying/ selling in our calculaion of reurns. 6 Transacion cos is assumed o be negligible. The performance of he five rading rules is evaluaed in erms of he annualized rae of reurn. Since here are abou 2 rading days each year, he annualized rae of reurn can be defined as follows: 2/ RA 1 r1 1 r2 1 r3 1 rm 1 where 1 ri S i B i, S(i) B(i) are respecively he selling buying prices of he i h ransacion; m is he number of ransacions in he sample; T is he number of rading days in he sample. 7 To assess he impac of he 08 Financial Tsunami on he profiabiliy of our rading rules, we furher spli he whole sample ino Pre-Tsunami Pos-Tsunami subsamples. The day when Lehman Brohers Holdings Inc. was delised from he New York Sock Exchange, 17 h Sepember 08, was se as he waershed. This is he major even ha marks he onse of he Financial Tsunami. The daily closing prices volume of each ETF are gleaned from DaaSream. The deails are repored in Table 1. T Bear Marke Caegory Table 1. ETF name lis ime period. Ticker ETF Name Overall Pre-Tsunami Pos-Tsunami SIJ SH DOG UDN SRS SMN SKF DUG ProShares UlraShor Indusrials ProShares Shor S&P0 ProShares Shor Dow30 PowerShares DB US Dollar Index Bearish ProShares UlraShor Real Esae ProShares UlraShor Basic Maerials ProShares UlraShor Financials Proshares UlraShor Oil & Gas 19/3/07-17/3/ 19/3/07-17/9/08 18/9/08-17/3/ 6 Shor selling means he shor selling of he ETF iself. ETFs in he Bear Marke Caegory someimes adop a sraegy of shor-selling is underlying asse. 7 Suppose we sar wih one dollar of invesmen, hen [(1 + r 1 )(1 + r 2 )(1 + r 3 ) (1 + r m )] will be he oal reurn afer all he m ransacions during period T. Afer aking he power of 2/T, less he iniial one dollar, we obain he annualized rae of reurn. Copyrigh 11 SciRes.

3 Lain America Caegory T. T.-L. CHONG ET AL. 131 Ticker ETF Name Overall Pre-Tsunami Pos-Tsunami EWZ ishares MSCI Brazil Index ishares S&P Lain America 40 Index ILF Telecommunicaions Caegory 19/3/07-17/3/ 19/3/07-17/9/08 18/9/08-17/3/ Ticker ETF Name Overall Pre-Tsunami Pos-Tsunami IXP ishares S&P Global Telecommunicaions Secor Index VOX Vanguard Telecommunicaion Services ETF 19/3/07-17/3/ 19/3/07-17/9/08 18/9/08-17/3/ PBS PowerShares Dynamic Media Porfolio Consumer Saples Caegory Ticker ETF Name Overall Pre-Tsunami Pos-Tsunami XLP Consumer Saples Selec Secor SPDR 19/3/07-17/3/ 19/3/07-17/9/08 18/9/08-17/3/ VDC Vanguard Consumer Saples ETF Bond Caegory Ticker ETF Name Overall Pre-Tsunami Pos-Tsunami HYG ishares iboxx $ High Yield Corporae Bond 11/4/07-17/3/ 11/4/07-17/9/08 GBF ishares Barclays Governmen/Credi Bond 13/3/07-17/3/ 13/3/07-17/9/08 BSV Vanguard Shor-Term Bond ETF /4/07-17/3/ /4/07-17/9/08 BLV Vanguard Long-Term Bond ETF /4/07-17/3/ /4/07-17/9/08 BIV Vanguard Inermediae-Term Bond ETF /4/07-17/3/ /4/07-17/9/08 CSJ ishares Barclays 1-3 Year Credi Bond 19/3/07-17/3/ 19/3/07-17/9/08 18/9/08-17/3/ GVI ishares Barclays Inermediae Governmen/Credi 19/3/07-17/3/ 19/3/07-17/9/08 Bond LQD ishares iboxx $ Invesmen Grade Corporae 19/3/07-17/3/ 19/3/07-17/9/08 Bond P ishares Barclays PS Bond 19/3/07-17/3/ 19/3/07-17/9/08 MBB ishares Barclays MBS Bond 16/3/07-17/3/ 16/3/07-17/9/08 U.S. Treasury Bill Caegory Ticker ETF Name Overall Pre-Tsunami Pos-Tsunami IEI ishares Barclays 3-7 Year Treasury Bond SHV ishares Barclays Shor Treasury Bond SHY ishares Barclays 1-3 Year Treasury Bond 19/3/07-17/3/ 19/3/07-17/9/08 18/9/08-17/3/ TLH ishares Barclays - Year Treasury Bond TLT ishares Barclays + Year Treasury Bond Table 2. a. Annual Rae of Reurn; b. Annual Rae of Reurn; c. Annual Rae of Reurn; d. Annual Rae of Reurn; e. Annual Rae of Reurn; f. Annual Rae of Reurn. a. Bear Marke Caegory Overall (19/03/07-17/03/) Pre-Tsunami (19/03/07-17/09/08) Pos- Tsunami(18/09/08-17/03/) Ticker Volailiy Buy-hold 0 MA Buy-hold 0 MA Buy-hold 0 MA SIJ 61% SH 27% Copyrigh 11 SciRes.

4 132 T. T.-L. CHONG ET AL. DOG 24% UDN % SRS 0% SMN 80% SKF 92% DUG 72% b. Lain America Caegory Overall (19/03/07-17/03/) Pre-Tsunami (19/03/07-17/09/08) Pos- Tsunami(18/09/08-17/03/) Ticker Volailiy Buy-hold 0 MA Buy-hold 0 MA Buy-hold 0 OVMA EWZ 47% ILF 51% c. Telecommunicaions Caegory Overall (19/03/07-17/03/) Pre-Tsunami (19/03/07-17/09/08) Pos- Tsunami(18/09/08-17/03/) Ticker Volailiy Buy-hold 0 MA Buy-hold 0 MA Buy-hold 0 OVMA IXP 26% PBS 29% NA VOX 28% d. Consumer Saples Caegory Overall (19/03/07-17/03/) Pre-Tsunami (19/03/07-17/09/08) Pos- Tsunami(18/09/08-17/03/) Ticker Volailiy Buy-hold 0 MA Buy-hold 0 MA Buy-hold 0 OVMA VDC 17% XLP 17% e. Bond Caegory Overall (19/03/07-17/03/) Pre-Tsunami (19/03/07-17/09/08) Pos- Tsunami(18/09/08-17/03/) Ticker Volailiy Buy-hold 0 MA Buy-hold 0 MA Buy-hold 0 OVMA HYG 17% GBF 7% BSV 5% BLV 12% BIV 9% NA CSJ 6% GVI 6% LQD 11% P 9% MBB 4% f. US Treasury Bill Caegory Overall (19/03/07-17/03/) Pre-Tsunami (19/03/07-17/09/08) Pos- Tsunami(18/09/08-17/03/) Ticker Volailiy Buy-hold 0 MA Buy-hold 0 MA Buy-hold 0 OVMA IEI 6% SHV 1% NA NA SHY 2% TLH 11% TLT 15% Resuls Conclusions Table 2 repors he annualized rae of reurn (in percenage) of our rading rules. Noe ha he MA rule performs consisenly well in he hree periods. For Bear Marke Lain America ETFs, he rading Copyrigh 11 SciRes.

5 T. T.-L. CHONG ET AL. 133 rules ousrip he buy--hold benchmark in almos all cases. Specifically, for he case of Proshares Ulrashor Financials (SKF), he MA is able o achieve an annual rae of reurn of 47%. For he Bear Marke ETFs, all he rading rules, especially MA, clearly dominae he buy--hold sraegy. For ETFs in Bond, Telecommunicaions Consumers Saples, our rading rules also bea he marke in general. Noe ha he rading rules excel in volaile markes. The higher he volailiy, he beer ha he relaive performance of he rules. For ETFs associaed wih US Treasury Bills, he rading rules fail o deliver a hsome reurn. For he whole sample period pre-tsunami period, he profis generaed by he rading rules are reasonably good. For he pos-tsunami period, our rading rules generae noably higher reurn han he benchmark. Overall, our resuls reveal ha he rading rule can bea he buy--hold sraegy in he ETF marke, especially for hose ETFs wih high volailiy. This is in conras o he convenional wisdom ha funds should be bough held. 4. References [1] L. Carrel, ETFs for he Long Run: Wha They Are, How They Work, Simple Sraegies for Successful Long- Term Invesing, Wiley, New York, 08. [2] D. Wagner, Trading ETFs: Gaining an Edge wih Technical Analysis (Bloomberg Marke Essenials: Technical Analysis), Bloomberg Press, New York, 08. [3] W. W. H. Tsang T. T. L. Chong, Profiabiliy of he On-Balance Volume Indicaor, Economics Bullein, Vol. 29, No. 3, 09, pp [4] J. H. Poerba J. B. Shoven, Exchange-Traded s: A New Invesmen Opion for Taxable Invesors, American Economic Review, Vol. 92, No. 2, 02, pp doi:.1257/ [5] W. J. Trainor Jr., Do Leveraged ETFs Increase Volailiy, Technology Invesmen, Vol. 1, No. 3,, pp doi:.4236/i [6] W. Brock, J. Lakonishok B. LeBaron, Simple Technical Trading Rules he Sochasic Properies of Sock Reurns, Journal of Finance, Vol. 47, No. 5, 1992, pp doi:.2307/ Copyrigh 11 SciRes.