Meltdown Investing: ETF Strategies for Times of Crisis

1. Meltdown Investing:
ETF Strategies for Times of Crisis
Jerry A. Miccolis, CFA®, CFP®, FCAS
Chief Investment Officer, Brinton Eaton

2. ERM Provides the Framework
Strategic Focus Targeting investment strategy to the right goals
Natural Hedging MPT, but modernized — shaking off 60 years of rust
Risk Exploitation Being opportunistic, but less naive
Catastrophe
Protection Tail risk hedging, without giving away the store
Brinton Eaton, 2011

3. Sector Rotation as Risk Management
S&P 500 TR Sector Rotation S&P 500 TR Sector Rotation
500 200
December 1991 - December 1999 175 December 1999 - December 2002
400
150
125
300
100
200
75
50
100
25
0 0
Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-99 Dec-00 Dec-01 Dec-02
S&P 500 TR Sector Rotation S&P 500 TR Sector Rotation
250 175
December 2002 - December 2007 150 December 2007 - September 2011
200
125
150
100
75
100
50
50
25
0 0
Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-07 Dec-08 Dec-09 Dec-10

4. Sector Rotation as Risk Management
S&P 500 TR Sector Rotation
3000
December 1991 - September 2011
2500
2000
1500
1000
500
0

5. Sector Rotation as Risk Management
S&P 500 TR Sector Rotation
12/11/1991-12/31/1999 21.0% 21.2%
12/31/1999-12/31/2002 -14.5% 19.9%
12/31/2002-12/31/2007 12.8% 16.3%
12/31/2007-9/30/2011 -4.6% 7.1%
12/11/1991-9/30/2011 7.8% 16.9%

6. How Else Did We Test This Strategy?
 Rolling annual returns
S&P 500 TR Sector Rotation
80%
60%
40%
20%
0%
-20%
-40%
-60%
 Maximum drawdowns
 Parameter robustness

7. The Overall Effect Is Game-Changing
S&P 500 Sector Rotation Sector Rotation + Combined Tail Risk Hedge
500
450
400
350
300
250
200
150
100
50
0
1/1/2007 1/1/2008 1/1/2009 1/1/2010 1/1/2011