Kaufman Efficiency Index Strategy compounded at +25.1% a year from 2016-10-24 to 2026-10-05, with a worst drawdown of -48.6% (very high drawdown). It ranks 6 of 6 re-run strategies by drawdown, shallowest first.
The rule in one line: The strategy holds one main position at a time: one of five leveraged equity ETFs (TQQQ, UPRO, SPXL, TNA, SOXL) in good markets, or one of long Treasuries (TLT), gold (GLD) and short Treasuries (SHY) otherwise.
| Worst drop (max drawdown) | -48.6% |
|---|---|
| Yearly growth (CAGR) | +25.1% |
| Return per unit of risk (Sharpe) | 0.86 |
| Total return | +826.6% |
| S&P 500 (SPY), same period | +322.2% |
| Return ÷ drawdown | 0.52 |
| Period | 2016-10-24 – 2026-10-05 (9.9 years) |
| Risk tier | Very high drawdown |
| Drawdown rank | 6 / 6 |
Backtest = historical simulation on past prices, not real trading.
Equity curve of a $10,000 start, with SPY dashed.
The strategy holds one main position at a time: one of five leveraged equity ETFs (TQQQ, UPRO, SPXL, TNA, SOXL) in good markets, or one of long Treasuries (TLT), gold (GLD) and short Treasuries (SHY) otherwise. It uses completed daily closes, trades at the next open and normally rebalances every 21 trading days.
A bull market is confirmed when SPY is above its 200-day average and higher than 63 trading days ago. The strategy then picks the leveraged fund with the highest efficiency ratio, which compares a fund's net three-month move with the total distance its price travelled day to day; it rewards smooth moves and does not check their direction. The position aims for 40% annualized volatility, within a range of 20% to 100% (65% for SOXL and TNA), and is trimmed by a quarter when volatility spikes or when SPY slips below its 20-day average. The rest goes to SHY. Otherwise it holds whichever of TLT, GLD or SHY has the best three-month return.
Daily exits apply: SPY closing 3% below its 200-day average, or falling over 5% in a week while below it, triggers the defensive pick. A fund 25% below its post-entry high while under its own 20-day average is swapped for SHY. An 18% account loss while SPY is below its 200-day average means 15 days in SHY.
| Universe | Risk-on: TQQQ, UPRO, SPXL, TNA, SOXL; risk-off: TLT, GLD, SHY; cash: SHY; market signal and benchmark: SPY. |
|---|---|
| Rebalancing | Every 21 trading days after the last trade. Emergency exits, trailing stops and the drawdown breaker are checked every day. |
| 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 3x ETF at a time, targeting 40% volatility within 20%–100% of the portfolio (SOXL and TNA capped at 65%); remainder in SHY. No margin. |
| Risk controls | SPY 3% under its 200-day average, or down 5% in a week below it: defensive. Fund 25% off its high while below its 20-day average: SHY. Drawdown 18% with SPY below trend: SHY 15 days. |
| Price data | Public daily price data adjusted for dividends and splits (open rescaled to match). Cash-like ETFs earn their adjusted market return. |
| Known limitations | The efficiency ratio ignores direction, so a smoothly falling fund can rank first and receive up to 100%. Defensive pick has no positive-momentum check. 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 (+64.1% against SPY's +21.7%) and its weakest was 2018 (-25.9% against -4.6%). It finished 2 full years with a loss (2018, 2022). In 2018, when SPY fell 4.6%, the strategy returned -25.9%. In 2022, when SPY fell 18.2%, the strategy returned -11.0%.
SPY fell more than 10% from a high 3 times in this window (2018-09-20 to 2018-12-24: SPY -19.4%, strategy -12.0%; 2020-02-19 to 2020-03-23: SPY -33.7%, strategy -21.7%; 2022-01-03 to 2022-10-12: SPY -24.5%, strategy -16.3%). 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 +30.8% on uptrend days (79% of the test) against SPY's +23.4%, so it kept pace with or beat 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 +18.1% against SPY's -77.2%; on downtrend days (10%), which include the sharp rebounds inside bear markets, +1.5% against +27.1%. Its losses were most concentrated in uptrend stretches: 88% of all losing-day losses came on 79% of the days.
On days SPY rose, the strategy captured 146% of the index's gains; on days SPY fell, it took 141% of the index's losses, an amplified profile that moved more than the index in both directions. 56% of months ended positive; the best month was 2026-05 (+26.7%) and the worst was 2018-02 (-23.2%).
The deepest drawdown on the daily curve ran from a peak on 2018-01-26 to a trough on 2019-08-14 (about 19 months of decline), a fall of -48.6%. Over the same stretch SPY returned +1.9%, so this loss was specific to the strategy rather than a market-wide sell-off. It regained the previous high on 2020-02-19, about 25 months after the peak.
| Year | Strategy | SPY | Difference |
|---|---|---|---|
| 2016 (partial) | +3.7% | +4.6% | -0.9% |
| 2017 | +64.1% | +21.7% | +42.4% |
| 2018 | -25.9% | -4.6% | -21.3% |
| 2019 | +23.9% | +31.2% | -7.3% |
| 2020 | +47.1% | +18.3% | +28.8% |
| 2021 | +49.5% | +28.7% | +20.8% |
| 2022 | -11.0% | -18.2% | +7.2% |
| 2023 | +24.2% | +26.2% | -2.0% |
| 2024 | +11.8% | +24.9% | -13.1% |
| 2025 | +33.0% | +17.7% | +15.3% |
| 2026 (partial) | +64.7% | +14.5% | +50.2% |
| Peak | Trough | Recovered | Fall | SPY, peak to trough |
|---|---|---|---|---|
| 2018-01-26 | 2019-08-14 | 2020-02-19 | -48.6% | +1.9% |
| 2024-07-10 | 2025-04-07 | 2025-08-13 | -29.0% | -9.3% |
| 2020-02-19 | 2020-06-26 | 2020-08-26 | -28.3% | -10.4% |
| SPY trend | Share of days | Strategy, annualized average | SPY, annualized average |
|---|---|---|---|
| Uptrend | 79% | +30.8% | +23.4% |
| Sideways | 8% | +18.1% | -77.2% |
| Downtrend | 10% | +1.5% | +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 -48.6%: a $10,000 account would have dropped to about $5,138 at that point before recovering. The +25.1% CAGR is the annual rate that compounds the start value into the end value over 9.9 years; the return-to-drawdown ratio of 0.52 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 Kaufman Efficiency Ratio. 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.