How I’m Going To Win Fund Frenzy

I love the iShares Fund Frenzy tournament. And this year I’m going to win.

I love March Madness. The buzzer-beaters; the underdogs; and of course, the brackets.

Filling out the annual bracket is a time-honored tradition in the Hougan household. My five-year old is armed already with opinions about which probable 12 seed will upset which 5 seed this March. And all in all, we do pretty well. I’ve won the bracket in the ETF.com office in two of the past five years.

My philosophy is simple: Be a reasonable outlier.

This year, for instance, it’s going to be hard to win our pool choosing Kentucky. Everyone is going to choose Kentucky. But Duke? Or ’Nova? You might have a chance.

Fund Frenzy

Just like I love the actual March Madness, I also enjoy the iShares Fund Frenzy tournament. In fact, I’m such a fan that ETF.com is a sponsor of it this year.

The way it works is simple: You go to the Fund Frenzy website, sign up and are presented with a bracket of different ETFs. The bracket looks like this:

Each round represents about a week of trading, with the first round running from March 23-27. The fund with the highest total return over that period advances to the next round, and so on, until a winner is crowned in mid-April.

You get points for each correct pick, and the points are progressive, i.e., you get more points for picking the ultimate winner (20) than any first-round matchup (1).

Playing is free, and iShares donates $1 to charity for everybody who signs up. The winner gets to choose which charity(ies) get the money, up to $25,000.

You can sign up here. It takes about 60 seconds.

Unlike in my office pool, I’ve never done particularly well in the Fund Frenzy tournament. Upon evaluation, there have been two flaws with my approach.

My Frenzy Flaw

First, my guiding philosophy has always been to choose the highest beta funds. It intuitively makes sense: The outliers should rise to the top in most up markets.

The problem is that the markets rarely go straight up for the four weeks of the tournament, and your picks get slaughtered during the downturns. Also, everyone does this, which means you are, at best, doomed to mediocrity.

Second, I’ve historically let idiosyncratic nonsense override even my simple philosophy. One year I picked the iShares Ireland ETF (EIRL | D-65) to win it all, because I’m mostly Irish and it was around Saint Patrick’s Day. Letting your emotions override common sense is rarely a recipe for success in investing.

A Better Approach For 2015

So how am I going to win in 2015?

Well, a good place to start is by examining last year’s winner.

Last year’s winner—Nick Romero —used a flows-based strategy to guide his picks, choosing only ETFs experiencing strong inflows. He layered on a top-down macro view of the world to complement his flows-based analysis.

Imitation is the highest form of flattery, so I’m adopting part of Nick’s approach into my model. I’m also eliminating all emotion, and adding a relative-strength component, on the idea that momentum may be a valid indicator over short time periods.

My approach this year will go like this:

Step 1: Develop a top-down view of the current market environment. Rank ETFs on whether the market environment is favorable (+1), neutral (0) or unfavorable (-1).

Step 2: Run a relative-strength model comparing paired ETFs on the day prior to each round. The one with the better relative strength gets +1 point.

Step 3: Compare one-day, one-week, one-month and one-quarter net inflows into competing ETFs. Assign 0.25 points for whichever ETF has stronger net inflows during each period.

How To Break Ties

Add up the points and select the winner. If things are tied, choose the fund that performed best over the trailing one-week period.

There’s no guarantee my methodology will actually choose the right funds. Over short periods of time, anything can happen (which is why, in real life, my average holding period is forever). But with no actual cash on the line (aside from the donation to charity), I’m free to go wild.

I’m liking my chances. Next week, I’ll look at what my actual bracket looks like.

Think you can beat me? Register today, fill out your bracket and we’ll see how you do.

At the time this article was written, the author held no position in the security mentioned. Contact Matt Hougan at [email protected].