We have discussed the idea of market seasonality a few times in this report in recent weeks. Today we’ll expand upon some of the previous work conducted by applying the same concept to the international markets.
The strategies tested below incorporate the historically observation that having exposure to the market during the seasonally strong six months is a “good” thing, and having exposure to the market during the seasonally weak period has caused more headache than actual return. In our PDP & SPLV Seasonality Study we explored having an over-weighted position to “High Relative Strength” (i.e. PDP) during the strong 6-month period and an overweighted exposure to “Low Volatility” (i.e. SPLV) during the seasonally weak period. In that case the study remained fulling invested year-round, using the PowerShares DWA Technical Leaders Fund [ PDP ] and PowerShares S&P Low Volatility ETF [ SPLV ]. During the seasonally strong six months (Nov 1- Apr 30), our portfolio would be 70% PDP and 30% SPLV, and during the seasonally weak six months, our portfolio would be 30% PDP and 70% SPLV. The results were certainly compelling, and generally replicated when we expand the concept to the International Equity market, or the US Small Cap market.
As you can see in the tables below, the low volatility International ETF (PowerShares S&P Emerging Markets Low Volatility ETF [ EELV ]) has generally provided greater returns during the seasonally weak six months than its International Technical Leaders ETF counterparts (PowerShares DWA Emerging Markets Technical Leaders [ PIE ] ). On the other hand, during the seasonally strong six months in the market, the Technical Leaders ETF has tended to provide greater returns than the performance of the Low Volatility ETF. This is consistent with what we have found within the US market study.
In a study going back to May 1999, during the seasonally weak six month period in the market, the Emerging Market Low Vol. fund (EELV) has seen a cumulative return far better than that of our High RS product (PIE). On the other hand, during the strong six month period, EELV has lagged PIE substantially. One practical approach is to overweight the Technical Leaders strategy during the seasonally strong six months and overweight the Low Volatility Indices during the seasonally weak six month period, which can be accomplished with PIE and EELV as your vehicles. The table below illustrates the impact of tilting toward EELV with a 70% allocation in the weak six months, and conversely tilting toward PIE during the seasonally strong six months systematically.
