Picking the Best Mutual Fund

Sunday, February 05, 2012

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Simple Truths

• This year's best fund is often next year's worst fund.

• No fund is always the best fund.

• The best fund is, invariably, a sector fund.

Sector Funds

Momentum strategies work best when trading among sector funds. These funds don't all look like the green S&P 500. Each follows its own chart pattern.

FastTrack's Momentum Monthly FTAlpha Model produces the red line which is the actual value of a portfolio traded once a month over many years using the FT Momentum Model. The red line consistently beats the green line (S&P 500 return) gaining over 20% annually (ANN=20.34%)

Try this Yourself at Home

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Click for more on how the Model trades sector funds.

For More than Sectors

The green line is the S&P 500. The yellow is line is a simple, equally weighted average of all growth mutual funds.

The chart shows that the average growth fund moves in the same pattern as the S&P, and has slightly better return than the S&P.

To take full advantage of growth funds, you have to trade. The red line is a quarterly Momentum Model (4 trades per year) of the same Growth funds. The annualized return for the last 21 years (Ann=) is more than 6% per year higher than the simple, equally weighted, quarterly rebalanced growth average.

A Diversified Portfolio

Vanguard offers a wide variety of funds, and they allow quarterly trading. This chart shifts assets among

VFINX,Vang 500 Index
NAESX,Vang SmallCap
VUSTX,Vang Long-term US Treasuries
VEIEX,Vang Emerg Mkts

The red Screen Average is computed by the FastTrack Quarterly Momentum Model.

• The red line is  much less volatile than the individual equity funds with better return.

• The bear market from 2000-2003 becomes a flat period, not a catastrophic loss. The draw down in 2007 and 2008 is substantially less than that of the VFINX

• The best periods of the volatile Emerging Markets fund are picked up, not the worst periods.

To try the Quarterly Vanguard Momentum Model Free,
Click to download.

Inverse Funds?

It is difficult to make money using Inverse funds. The Momentum Model works well in the universe of exchange traded funds and moderate bear funds like Rydex Inverse S&P-500. The model shown makes monthly momentum trades.

SPY   S&P 500(SPDR)
MDY   S&P 400(SPDR
RYURX Rydex Inverse S&P-500
EEM   MSCI Emerg Mkt(iS)

In this case the Monthly Momentum Model's resistance to the bear market is provided by Rydex Inverse S&P-500. Use of bear funds always reduces volatility, but can hurt bull market return. The portfolio could be traded daily without redemption fees and restrictions.

To try trading inverse funds using the Momentum Model Free, Click to download.

Note that many ETF's, like EEM, have only a small amount of historical data, but you will find that they closely correlated to similar Vanguard funds with 20+ years of history. Run the Model with the long established funds, but trade the equivalent ETF. We used Rydex Inverse S&P-500 as the short fund because it has more history than the Short ETF's. However, note that RYURX has less overhead and expenses that the enhanced short index funds. This strategy may not work with the all short S&P-500 funds. Not all short funds are created equal!

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Call 866-295-0166 for help getting started. We will show you how to do these strategies for yourself.