ETF Rotation Using Relative Momentum and Low-Correlation Assets

Summary

This note reconstructs a Chinese ETF rotation strategy that selects a small pool of relatively uncorrelated assets, including equity index ETFs and gold. Every five trading days, it compares each fund’s 20-day return, holds the strongest when that return is positive, and otherwise moves to cash or a bond fund. The approach uses full allocation to one ETF at a time. The note also suggests recalculating correlations periodically so the rotation pool can adapt as relationships between assets change.

The author reports a backtest from 2018 through 2023 and compares its headline performance with results from the original forum post. A later test using an updated ETF pool is also described. These are historical results, with no transaction costs in the initial test; the note acknowledges that costs can matter. It flags full concentration as a capacity and risk concern, and warns that trend signals may whipsaw in sideways markets. The proposed improvement depends on whether past correlations persist and whether the return rule identifies falling trends reliably, so the reported backtests do not establish future performance.

Key ideas

• The strategy ranks a selected ETF pool by 20-day returns and holds the strongest fund when its return is positive.
• The initial pool is chosen for low historical correlation and includes equity index funds and gold.
• The strategy checks positions every five trading days to reduce trading frequency.
• Periodic correlation updates can change the eligible ETF pool as asset relationships shift.
• Full allocation to one fund creates concentration and capacity risks, while sideways markets can cause repeated trades.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.