Tactical Trend Following With ETFs

The merits of trend following have been debated by academics and market participants over the years, but by adding other evaluation tools, such as relative strength, trend following strategies can be enhanced.

Cumberland Advisors employs a trend following strategy for exchange traded funds that uses trend, price, and relative strength to identify investment opportunities across multiple asset classes, including equities, fixed income, currencies and commodities.

“Relative strength and related trend analysis is run on a weekly basis, though the asset class changes tend to occur less frequently since upward or downward trends can stay in force for months or a year at a time. In August 2014 the portfolio had the majority of its ETF investments tied to U.S. equities, with a smaller stake in international equities,” said S&P Capital IQ in a research note that looks at the Cumberland trend following strategy run by manager Matthew McAleer.

McAleer’s portfolio holds 10 to 20 positions at a time with half of the U.S. equity positions allocated to so-called core positions with the remainder devoted to more focused ETFs, such as industry funds, according to S&P Capital IQ.

One of Cumberland’s core ETF positions is the Guggenheim S&P Equal Weight ETF (NYSEArca: RSP), which is continuing its track record of outperforming cap-weighted S&P 500 ETFs again this year. [Race to 2000 Sends Cash to S&P 500 ETFs]

RSP is up 10.2% this year compared to an 9.5% gain for traditional S&P 500 ETFs. RSP, which S&P Capital IQ rates overweigth, has surged nearly 311% since the March 9, 2009 market bottom compared to a 229.5% for the cap-weighted S&P 500. [Pay Attention to the Equal-Weight S&P 500 ETF]

Another one of Cumberland’s core U.S. equity positions is the Vanguard Small Cap ETF (NYSEArca: VB). VB, rated marketweight by S&P Capital IQ, charges a scant 0.09% per year, making it less expensive than 93% of comparable small-cap funds, according to Vanguard data.

“While the relative strength for small caps had weakened through mid-August, McAleer still believed the investment style was attractive. The weighted average market capitalization of VB’s holdings, at $3.3 billion was much lower than the $35 billion of RSP. Both ETFs have bullish technical trends,” according to S&P Capital IQ.

One of Cumberland’s more focused industry holdings is the high-flying First Trust NYSE Arca Biotechnology Index Fund (NYSEArca: FBT). FBT is up 33% this year, making it 2014’s top-performing non-leveraged health care ETF. After jumping 14% in August alone, FBT was that month’s best-performing non-leveraged ETF of any stripe.

FBT was already cruising toward a solid August performance when, late in the month, Swiss pharmaceuticals giant Roche announced it will acquire InterMune (NasdaqGS: ITMN) for $8.3 billion in cash. Before that deal was announced, FBT had the largest weight to InterMune of any of the five major biotech ETFs. [InterMune Deal Lifts Biotech ETFs]