The Power of Linear Combination ETF Portfolios

Money lubricant that gets the wheels moving. I wanted to test a new investing strategy and existing strategies of picking stocks had mixed results, with large draw-downs and stagnation between gains. So I ponied up $35 for this cool program etfreplay and began testing strategies, which I call ‘linear combinations’. This is because you are taking some linear combination of ETFs and weightings to create a superior portfolio to just passive indexing and with less risk than owning an individual stocks.

Here is one such combination that is long 50% TQQQ (nasdaq 100), long 40% TMF (20 year treasuries) and short 10% EDC (emerging markets) rebalanced quarterly:

It has beaten the market every year since 2010 and has annual returns close to 50%. To demonstrate the power of linear combinations, there is no individual stock in existence that has produced such substantial, consistent risk adjusted returns for the past five years.