Using Two Sets of Multiple Moving Averages of Price to Time Positions in a Portfolio of Exchange Traded Funds

Abstract

This paper attempts to determine if the use of two sets of multiple moving averages of price can be employed to generate above market portfolio rates of return in a portfolio of exchange traded funds. A set of short term moving averages of price and a set of long term moving averages of price and the relationship within each set are used to determine the timing of entry and exit points for establishing positions in the exchange traded funds (ETFs). Returnsusing the moving average convergence divergence (MACD) indicator and a combination of the short term MACD and long term MACD to determine entry and exit points are compared to a buy and hold strategy of the S&P 500 Index. The portfolio returns over a five year time period (1/1/2006 – 12/31/2010) are calculated and compared to their S&P 500 benchmark. A comparison is then performed between a portfolio of seven exchange traded funds using thecombined S-T MACD indicator and the L-T MACD indicator for entry and exit points to a buy and hold equally weighted and rebalanced portfolio comprised of the same exchange traded funds. The asset classes represented in the portfolio include domestic equities, developed foreign equities, emerging market foreign equities, domestic bonds, precious metals, and real estate. The use of two MACD indicators used in sequence with different parameters was found to increase the return of a portfolio of exchange traded funds for the selected holding period over a buy and hold strategy.