European Model Profits in Spite of Financial Crisis!

Tim Fortier  |

With news from Europe dominating the financial headlines, I thought it would be interesting to see how a systematic approach to trading European Exchange-Traded Funds would have handled the market turmoil.

Recently, I revisited Mebane Faber's famous study involving the use of a monthly simple moving average (SMA) to broad asset classes in order to minimize risk and maximize return.  There is more detail on this study in a prior post at the Portfolio Café.

The goal here was to apply the same systematic model to a list of ETFs that invested strictly in European indices. And to see how it performed against a buy-and-hold investment strategy.

For the test of European ETFs, I focused on an 8-month simple moving average (SMA) with 9 European centric ETFs:

  • Germany: iShares MSCI Germany Index (EWG)
  • Italy: iShares MSCI Italy Index (EWI),
  • Belgium: iShares MSCI Belgium Investable Mkt Idx (EWK)
  • Switzerland: iShares MSCI Switzerland Index (EWL)
  • Netherlands: iShares MSCI Netherlands Invstbl Mkt Idx (EWN)
  • Austria: iShares MSCI Austria Investable Mkt Idx (EWO)
  • Spain: iShares MSCI Spain Index (EWP)
  • France: iShares MSCI France Index (EWQ)
  • United Kingdom: iShares MSCI United Kingdom Index (EWU)

At the end of each update period the backtest calculated whether each ETF in the portfolio was above or below the moving average.  And for the next period, the model invested ONLY in those ETFs that were above the moving average.  All others were switched to cash .

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This is a critical component for systematic investing.  When the investment model no longer supports the investment thesis—regardless of how you “feel” about the investment—the model moves the position to cash.

For a comparative benchmark, I chose the iShares MSCI EMU Index (EZU)—corresponding to publicly traded securities within the European Monetary Union.   For the time period I chose a starting year of 2003 and an ending date of November 30, 2011 … right through the heart of the financial crisis!

And here are the results :

Twice the Return for Half the Volatility

The results heavily favored the use of some type of risk management process versus “buying and hoping” things work out.  Using just the simple moving average system the ETF basket produced nearly twice the annual rate of return with half of the volatility.  And the maximum drawdown was reduced by 72 percent.

To round things out, I ran one additional study.   Each month I allocated to the top performing ETF that was above the moving average and was performing better than cash.

The results of this test showed a  CAGR of 19.1 percent or 3x over a “buy-and-hope” strategy for EZU. And the increase in risk was comparatively small.

Having an unemotional and systematic approach to managing exposure in the European markets—or any financial market for that matter—clearly makes sense.  These systematic models work well for domestic equities, ETF’s, and many other asset classes as well. And you can find out more about systematic investing at the Porfolio Café.

So … to close out our study on the European ETFs, you probably want to know how where the model is positioned today?

As of September 1st  … the European model is 100 percent in cash!

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


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