As of 04/19/2024   Indus: 37,986 +211.02 +0.6%     Trans: 15,084 +136.79 +0.9%     Utils: 876 +15.31 +1.8%     Nasdaq: 15,282 -319.49 -2.0%     S&P 500: 4,967 -43.89 -0.9%	YTD  +0.8%   -5.1%   -0.7%    +1.8%    +4.1%	Targets    Overview: 04/12/2024     39,800 or 37,150 by 05/01/2024   16,200 or 15,000 by 05/01/2024   885 or 850 by 05/01/2024   16,700 or 15,800 by 05/01/2024   5,250 or 5,025 by 05/01/2024
Chart Pattern Indicator: on 4/1/24

As of 04/19/2024   Indus: 37,986 +211.02 +0.6%     Trans: 15,084 +136.79 +0.9%     Utils: 876 +15.31 +1.8%     Nasdaq: 15,282 -319.49 -2.0%     S&P 500: 4,967 -43.89 -0.9%	YTD  +0.8%   -5.1%   -0.7%    +1.8%    +4.1%
Targets    Overview: 04/12/2024     39,800 or 37,150 by 05/01/2024   16,200 or 15,000 by 05/01/2024   885 or 850 by 05/01/2024   16,700 or 15,800 by 05/01/2024   5,250 or 5,025 by 05/01/2024
Chart Pattern Indicator: on 4/1/24

Bulkowski on Trading Mutual Funds

Trading Mutual Funds Summary

I tested several variations of Vanguard mutual funds and found that:

• Performance from both index and non-index funds excel when the two best performing funds are bought and held for at least 7 months.
• Index funds show good performance when the two worst performing funds are bought and held for at least 9 months.
• Going into cash hurts performance.
• Not trading the top two performers results in worse performance.

Trading Mutual Funds Background

My retirement funds (IRAs) are managed by mutual funds. Since they are long term holdings, I have taken the buy-and-hold approach. In other words, I bought and held them as prices peaked in 2000 and continued to hold them as prices dropped during the 2000 to 2002 bear market. I did not know how to trade them to optimize performance. So, I decided to test if I could find a way to trade them and boost profitability. Both of the test portfolios described here show performance that is nearly twice as good as my buy-and-hold approach. This page is a result of that research.

Trading Mutual Funds Methodology

I chose the Vanguard family of funds due to their low costs (no-loads, low management fees), diversity, availability of index funds, and good performance. The research only uses these funds, so you may want to test these concepts over a wider range of funds.

The funds do not include balanced funds, any fund with a mandatory hold time over 2 months, and any fund that has a buy in fee. The list has 38 funds that qualified.

The minimum hold time of 2 months is to prevent turnover (many funds do not like frequent trading, including Vanguard). The longest minimum hold time was 12 months, meaning I tested holding onto a fund for at least a year before considering trading it.

The analysis assumes that no commissions are charged, such as redemption fees or broker commissions. These are no load funds and the assumption is that you will trade them through Vanguard and not a broker. All trades occur the day after the trading signal, using that day's net asset value (NAV).

I tested owning 1 fund but decided that 2 was the minimum to hold for diversification. I limited the number of funds owned to 5 because each fund contains the stocks of other companies, so they are diversified already. Owning more than 5 funds seemed like overkill and switching more than that every few months did not appeal to me.

Portfolio #1: Winners

The first portfolio I tested buys only the best performing mutual funds, but it includes both index and non-index funds. Here is the list of funds tested: NAESX, VCVLX, VDAIX, VDEQX, VDIGX, VDMIX, VEIPX, VEURX, VEXMX, VEXPX, VFINX, VFTSX, VFWIX, VGEQX, VGTSX, VHDYX, VHGEX, VIGRX, VIMSX, VISGX, VISVX, VIVAX, VLACX, VMGIX, VMGRX, VMRGX, VMVIX, VPACX, VQNPX, VSEQX, VSTCX, VTRIX, VTSMX, VUVLX, VWIGX, VWNDX, VWNFX, VWUSX.

Portfolio #2: Losers

I discovered this portfolio by accident when trying to reproduce Busby's results (see Variations below). I found that performance improved when trading two of the worst performing index funds (only) and holding them for 9 months. Here is the list of index mutual funds that I tested: NAESX, VDAIX, VDMIX, VEURX, VEXMX, VFINX, VFTSX, VFWIX, VGTSX, VHDYX, VIGRX, VIMSX, VISGX, VISVX, VIVAX, VLACX, VMGIX, VMVIX, VPACX, VTSMX, VTWSX.

Trading Mutual Fund Results

I tested several time periods using various initial funds for the portfolio. The following table shows a summary of the results found in the Excel spreadsheets. The compressed file contains all three spreadsheets mentioned on this page, so download it once and you're done.

All of the tests end 9/1/2008 except for the bear market, which runs from 3/1/2000 to 10/1/2002.

Table Definitions

Starting. As the table shows, I varied the start dates to include a bear market or just limit it to a bull market. I think the 1/1/2003 period is the most important but the 1998 span is also a good test. Dates older than that might eliminate too many funds, meaning they did not exist back then.

Number of Funds. This is the optimum number of funds to hold, giving the best results. I used a minimum of 2 funds since I wanted at least some diversification.

Hold Time. In months, this is the duration of ownership. It must be at least 2 months. The numbers show the optimum hold time.

Approximate Initial Funds. The tests in the spreadsheet give the actual numbers for the size of the portfolio before the tests began.

Approximate Gain. This is how much the trading system made during the test. For the exact number, consult the spreadsheets.

Max Loss. This is the largest drop below the buy price. It is not the draw down, rather, it is how much you could lose.

Cash Used? Only one test benefited from going into cash and that was during a bear market. The other tests showed better performance by remaining invested, including those that included the bear market.

Best Method. This details which portfolio method worked best: trading the best performing funds (Winners), the worst performing funds (L or Losers), or a combination of both (W/L).

Type. This shows the construction of the funds. Index included only index funds. Both included index and non index funds. None of the tests showed the best results using non index funds.

As the results show, I chose the first two lines and built portfolios around them. Do not try to compare the rows to each other because I varied the initial funds. Use the spreadsheet to review each line and the various combinations of parameters. You may find other combinations that are more beneficial than the ones I chose.

Trading Mutual Fund Variations

Cash

It makes sense that if all mutual funds are losing money then going into cash would be beneficial. I tried three variations to prove this but without much success. As a signal that it was time to go into cash, I used the top performing fund starting to lose money, the worst performing fund losing money, and a fund in the middle of the pack losing money. If the top performing fund is losing money, the all of the others are, too. The results of my testing appear in the Excel spreadsheet Cash tests.xls, so I need not duplicate them here. As the Results table shows, going into cash helped only during a bear market and did not add value to other periods that included the bear market.

Busby Approach

The book, Winning the Day Trading Game, by Thomas Busby with Patsy Busby Dow is what started me along the road to testing mutual funds. In their book, on page 121, they show a check list for trading mutual funds. Here it is.

1. At the start of each year, pick the top 10 performing mutual funds over the prior year.
2. Remove the top 2 performing funds.
3. Use 80% of your funds to buy those 8 funds (put 10% into each).
4. On April 1, sell the worst 3 performing funds and put the proceeds into the other 5 funds.
5. On July 1, sell the worst 2 performing funds and put the proceeds into the other 3 funds.
6. If any fund makes 10% or more, then either sell it all or sell half of it.
7. On October 1, sell the worst performing fund and put the cash into the remaining 2 funds.
8. At year end, begin the process again.

With the other 20%, he buys index funds, but I did not test his index fund setup.

To test his trading setup, I made several assumptions. I started with both index and non index funds and tested those then removed the index funds and tested the non index funds (only). I used the top 10 performing funds from Vanguard, not from the universe of mutual funds. I chose the top 10 funds using year over year performance and not month to month or other measures. I put 100% of my funds into the 8 funds instead of 80% (since I was not testing index funds using his approach). I test variations assuming a sale of any fund making 10% or more after 6 months only and after both 6 and 9 months. I also tested holding the funds and not selling at all and selling only half at 6 and both 6 and 9 month intervals.

This is what I found.

• Removing the top 2 performing funds hurts performance. I tested variations of removing none to 4 funds and found that the best performance came from having all funds present at the start. My research on industry relative strength shows that trading the top performing industry results in superior performance. If you apply that logic to mutual funds, then you should not discard the top two performers as he suggests.
• Selling 10% is a mistake. I tested the variations of selling none, half and all at 6 months and 6 and 9 month intervals and found that selling a fund that is performing well results in worse performance. It takes you out of the market. You are selling your winners and holding your losers, the exact opposite of what you should be doing.
• Testing using non index funds results in worse performance. The best performance comes from having both index and non index funds in the test. By "Index," Busby may be suggesting trading funds that mirror the major indices (Dow, Nasdaq, S&P) and not the numerous variations that Vanguard offers.
• The Busby approach, including its variations, performed less well than the two test portfolios (winners and losers).

To review the performance of the Busby approach, you will find it in the Excel spreadsheet Details.xls (contained in a compressed file, MuttFunds.zip).

Both Winners and Losers

I tried using a combination of winners and losers, switching between trading the best funds and the worst funds when performance flipped from positive to negative. As the table in the Results section shows, only one test was strong enough to remain. That was during this year, 2008. I chose to ignore it because the duration did not allow enough trades to be meaningful.

-- Thomas Bulkowski

See Also

• ETFs. What you should know.
• ETNs. What are they?
• How to pick stocks, part 1.
• Stocks that double. Discover what attributes they share.
• 3 tips to help you pick stocks.
• 12 tips for stock selection.

 

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