The Impact of Rebalancing Strategies on ETF Portfolio Performance

Attila Bányai, Tibor Tatay (), Gergő Thalmeiner and László Pataki
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Attila Bányai: Doctoral School of Economic and Regional Sciences, Hungarian University of Agriculture and Life Sciences, Páter Károly Str. 1, H-2100 Gödöllő, Hungary
Tibor Tatay: Department of Statistics, Finances and Controlling, Széchenyi István University, Egyetem Square 1, H-9026 Győr, Hungary
Gergő Thalmeiner: Department of Investment, Finance and Accounting, Hungarian University of Agriculture and Life Sciences, Páter Károly Str. 1, H-2100 Gödöllő, Hungary
László Pataki: Doctoral School of Management and Business Administration, John von Neumann University, Infopark sétány 1, HU-1117 Budapest, Hungary

JRFM, 2024, vol. 17, issue 12, 1-16

Abstract: This research explores the efficacy of rebalancing strategies in a diversified portfolio constructed exclusively with exchange-traded funds (ETFs). We selected five ETF types: short-term U.S. Treasury bonds, U.S. equities, global commodities, U.S. real estate investment trusts (REITs), and a multi-strategy hedge fund. Using a 10-year historical period, we applied a unique simulation model to generate random portfolios with varying asset weights and rebalancing tolerance bands, assessing the impact of rebalancing premiums on portfolio performance. Our study reveals a significant positive correlation (r = 0.6492, p < 0.001) between rebalancing-weighted returns and the Sharpe ratio, indicating that effective rebalancing enhances risk-adjusted returns. Support vector regression (SVR) analysis shows that rebalancing premiums have diverse effects. Specifically, equities and commodities benefit from rebalancing with improved risk-adjusted returns, while bonds and REITs demonstrate a negative relationship, suggesting that rebalancing might be less effective or even detrimental for these assets. Our findings also indicate that negative portfolio rebalancing returns combined with positive rebalancing-weighted returns yield the highest average Sharpe ratio of 0.4328, highlighting a distinct and reciprocal relationship between rebalancing effects at the asset and portfolio levels. This research highlights that while rebalancing can enhance portfolio performance, its effectiveness varies by asset class and market conditions.

Keywords: portfolio rebalancing; Exchange-Traded Funds (ETFs); risk-adjusted returns; asset allocation; Sharpe ratio (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2024
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