Tuesday, August 7, 2012

XLK vs. QQQ 8.7.12

This is a further refinement of the TAQ workhorse portfolio with the new addition of XLK (the SPYDER sector Technology ETF) and SH (the SPY inverse).  Note that SH is shown with zero allocation and we'll get to that next week.  Also note that the model name is DN--signifying delta neutral...a concept distinct from market neutral which, once again, will be explored in greater detail next week. (The allocations shown do not reflect a delta neutral portfolio).

A quick check of this weekend's TAQ snapshot will reveal that this blend picks up a couple percentage points on the return side while the shoter term (last 3 years) drawdown is effectively the same.  Why is that?
Referring to yesterday's big picture post it's clear that XLK price behavior is less volatile that the Qs so the returns are more linear.  Both ETFs have the AAPL bias going for them (or against them) but XLK deoes demonstrate a higher RSQ than the Qs.  The price to pay is in total returns, where the Qs excel. 

It should therefore come as no surprise that if we reverse the Qs and XLK allocations the results don't improve, in fact retrace below a strictly Qs position.

The addition of XLK to the TAQ portfolio looks like a good match going forward.  Of course, all this is premised on the superiority of the Qs as an equity generating machine and the performance dominance of AAPL within that ETF. 

What could go wrong with that scenario?