Dynamic Factor Strength Strategy compounded at +18.0% a year from 2016-10-24 to 2026-10-05, with a worst drawdown of -24.1% (moderate drawdown). It ranks 1 of 6 re-run strategies by drawdown, shallowest first.
The rule in one line: The strategy mainly holds two US factor ETFs, chosen from momentum (MTUM), quality (QUAL), minimum volatility (USMV), value (VLUE), and large-cap growth (IWF) and value (IWD).
| Worst drop (max drawdown) | -24.1% |
|---|---|
| Yearly growth (CAGR) | +18.0% |
| Return per unit of risk (Sharpe) | 0.97 |
| Total return | +417.8% |
| S&P 500 (SPY), same period | +322.2% |
| Return ÷ drawdown | 0.75 |
| Period | 2016-10-24 – 2026-10-05 (9.9 years) |
| Risk tier | Moderate drawdown |
| Drawdown rank | 1 / 6 |
Backtest = historical simulation on past prices, not real trading.
Equity curve of a $10,000 start, with SPY dashed.
The strategy mainly holds two US factor ETFs, chosen from momentum (MTUM), quality (QUAL), minimum volatility (USMV), value (VLUE), and large-cap growth (IWF) and value (IWD). At the end of each month it uses completed closes to pick the two with the best six-month return relative to recent volatility, plus the leveraged ETF (TQQQ, UPRO or SPXL) with the best blend of one-, three- and six-month returns. Trades happen at the next open.
How much it invests depends on SPY. In a strong bull market, with SPY above its 50- and 200-day averages and its recent volatility at most 25% a year, it puts 40% into the leveraged fund and 60% into the two factor ETFs, scaled down when SPY is volatile. In weaker or choppier markets it holds only the factor ETFs at a lower risk target. Unused money sits in short Treasuries (SHY). In a bear market it holds half long Treasuries (TLT) and half gold (GLD), each swapped for SHY when below its 50-day average.
Daily rules can act sooner: bear signals switch to defensive assets at once, the leveraged fund is dropped after a 15% fall from its high or six SPY closes below its 50-day average, and a 12% account drawdown moves everything to SHY until the trend recovers.
| Universe | Factors: MTUM, QUAL, USMV, VLUE, IWF, IWD; leveraged: TQQQ, UPRO, SPXL; defensive: TLT, GLD; cash: SHY; market signal and benchmark: SPY. |
|---|---|
| Rebalancing | Monthly: signal on the last trading day of the month, trade on the first day of the next. Bear exits, leverage stops and the breaker run daily. |
| Execution | Signals use completed daily closes only; orders fill at the next session's open and positions are marked at the close. |
| Trading costs | 0.25% per side on every dollar bought or sold (about 0.50% for a full switch). No separate slippage or spread model. |
| Leverage | One of TQQQ, UPRO or SPXL at up to 40%, only in a calm strong bull market (SPY volatility at most 25%), scaled down by SPY volatility. No margin. |
| Risk controls | Bear signal: TLT/GLD/SHY at once. Leverage dropped after a 15% fall from its high (10-day lockout) or six SPY closes below its 50-day average. Account down 12%: 100% SHY. |
| Price data | Public daily price data adjusted for dividends and splits; missing prices carry forward the last value. SHY earns its adjusted return. |
| Known limitations | Carried-forward prices can be stale on missing days. Sizing follows SPY's volatility, not the portfolio's own. Hand-picked ETFs; parameters chosen on the same 10-year window. |
Across the 9 full calendar years in the test, the strategy beat SPY in 5. Its best year was 2017 (+48.0% against SPY's +21.7%) and its weakest was 2022 (-14.8% against -18.2%). It finished 1 full year with a loss (2022). In 2018, when SPY fell 4.6%, the strategy returned +0.7%. In 2022, when SPY fell 18.2%, the strategy returned -14.8%.
SPY fell more than 10% from a high 3 times in this window (2018-09-20 to 2018-12-24: SPY -19.4%, strategy -11.7%; 2020-02-19 to 2020-03-23: SPY -33.7%, strategy -13.9%; 2022-01-03 to 2022-10-12: SPY -24.5%, strategy -13.9%). The strategy lost less than the index in 3 of 3 of those declines, so its rules did act as a brake when the whole market sold off.
Labelled by SPY's trend (above a rising 200-day average = uptrend, below a falling one = downtrend, anything else = sideways), the strategy averaged an annualized +22.8% on uptrend days (79% of the test) against SPY's +23.4%, so it trailed the index in steady rising markets. On sideways days (8%), which is where trend breaks and the first leg of sell-offs land, it averaged -11.1% against SPY's -77.2%; on downtrend days (10%), which include the sharp rebounds inside bear markets, -4.2% against +27.1%. Its losses were most concentrated in uptrend stretches: 89% of all losing-day losses came on 79% of the days.
On days SPY rose, the strategy captured 93% of the index's gains; on days SPY fell, it took 88% of the index's losses, a roughly symmetric profile, so its edge did not come from sidestepping down days. 63% of months ended positive; the best month was 2026-05 (+18.8%) and the worst was 2018-02 (-15.1%).
The deepest drawdown on the daily curve ran from a peak on 2021-11-19 to a trough on 2023-03-10 (about 16 months of decline), a fall of -24.1%. Over the same stretch SPY returned -16.1%, so the loss came while the market itself was falling. It regained the previous high on 2023-07-12, about 20 months after the peak.
| Year | Strategy | SPY | Difference |
|---|---|---|---|
| 2016 (partial) | +9.6% | +4.6% | +5.0% |
| 2017 | +48.0% | +21.7% | +26.3% |
| 2018 | +0.7% | -4.6% | +5.3% |
| 2019 | +6.5% | +31.2% | -24.7% |
| 2020 | +24.3% | +18.3% | +6.0% |
| 2021 | +35.1% | +28.7% | +6.4% |
| 2022 | -14.8% | -18.2% | +3.4% |
| 2023 | +25.8% | +26.2% | -0.4% |
| 2024 | +20.2% | +24.9% | -4.7% |
| 2025 | +17.2% | +17.7% | -0.5% |
| 2026 (partial) | +17.5% | +14.5% | +3.0% |
| Peak | Trough | Recovered | Fall | SPY, peak to trough |
|---|---|---|---|---|
| 2021-11-19 | 2023-03-10 | 2023-07-12 | -24.1% | -16.1% |
| 2018-01-26 | 2019-10-02 | 2020-01-17 | -23.9% | +3.9% |
| 2020-02-19 | 2020-06-11 | 2020-08-26 | -19.3% | -10.6% |
| SPY trend | Share of days | Strategy, annualized average | SPY, annualized average |
|---|---|---|---|
| Uptrend | 79% | +22.8% | +23.4% |
| Sideways | 8% | -11.1% | -77.2% |
| Downtrend | 10% | -4.2% | +27.1% |
Computed from the daily equity curve of the same re-run (2016-10-24 to 2026-10-05). Trend labels classify each day after the fact (SPY above a rising 200-day average = uptrend, below a falling one = downtrend, otherwise sideways); they describe the past and are not a trading signal. Annualized averages are the mean daily return in that group times 252.
The worst peak-to-trough fall was -24.1%: a $10,000 account would have dropped to about $7,593 at that point before recovering. The +18.0% CAGR is the annual rate that compounds the start value into the end value over 9.9 years; the return-to-drawdown ratio of 0.75 says how many points of annual return each point of worst-case loss bought. Compare strategies on that pair, not on CAGR alone.
Re-run on 2026-10-07 with the strategy's current code on historical prices — a systematic take on Dynamic Factor Timing. Numbers change when the strategy is re-run on newer data. The full write-up explains the rules.
All strategy backtests, lowest drawdown first
Disclosure. Backtests are hypothetical simulations on historical data. They do not include every real-world cost, are not live results, and do not guarantee future returns. Educational research only, not investment advice.