Equity · United States · ETFs · Daily · United States Free

Spread Trading with ADRs

Academic paper

Paper linkhttps://papers.ssrn.com/sol3/papers.cfm?abstract_id=2858048

Strategy in a nutshell

The investment universe consists of two ETFs: SPY (S&P500 ETF) representing the US market and FXI (iShares China Large-Cap ETF) representing Chinese ADRs. The investor sets a threshold of -0.4% for the daily spread between ADR and SPY. When the spread falls below this value, the investor opens positions, going long on FXI and short on SPY. The position is held for one day and closed at market close. The portfolio is equally weighted, and the strategy is rebalanced daily.

Economic rationale

The strategy exploits the time-inconsistent behavior of ADRs, especially those from Asian countries. These ADRs are influenced by both U.S. and home market sentiments, leading to asynchronous price movements. This creates spreads between ADR prices and SPY, which the strategy assumes will revert to the mean, allowing profitable trades based on the threshold.

Backtest performance

Annualised return14%

Volatility16.35%

Beta0.025

Sharpe ratio0.61

Sortino ratio-0.369

Win rate46%

Full Python code

1from AlgorithmImports import *
2class SpreadTradingADRs(QCAlgorithm):
3def Initialize(self):
4self.SetStartDate(2000, 1, 1)
5self.SetCash(100000)
6self.symbols = ['SPY', 'FXI']
7
8self.k = -0.004
9
10for symbol in self.symbols:
11    self.AddEquity(symbol, Resolution.Minute)
12
13self.spy_open_price = 0
14self.fxi_open_price = 0
15
16self.Schedule.On(self.DateRules.EveryDay(self.symbols[0]), self.TimeRules.AfterMarketOpen(self.symbols[0], 1), self.MarketOpen)
17self.Schedule.On(self.DateRules.EveryDay(self.symbols[0]), self.TimeRules.BeforeMarketClose(self.symbols[0], 1), self.Rebalance)
18
19def MarketOpen(self):
20if self.Securities.ContainsKey(self.symbols[0]) and self.Securities.ContainsKey(self.symbols[1]):
21    spy_price = self.Securities[self.symbols[0]].Open
22    fxi_price = self.Securities[self.symbols[1]].Open
23    if spy_price != 0 and fxi_price != 0:
24        self.spy_open_price = spy_price
25        self.fxi_open_price = fxi_price
26                
27def Rebalance(self):
28self.Liquidate()
29
30if self.Securities.ContainsKey(self.symbols[0]) and self.Securities.ContainsKey(self.symbols[1]):
31    spy_price = self.Securities[self.symbols[0]].Close
32    fxi_price = self.Securities[self.symbols[1]].Close
33    
34    if spy_price != 0 and fxi_price != 0 and self.spy_open_price != 0 and self.fxi_open_price != 0:
35        spy_ret = spy_price / self.spy_open_price - 1
36        fxi_ret = fxi_price / self.fxi_open_price - 1
37        
38        if fxi_ret - spy_ret < self.k:
39            self.SetHoldings('FXI', 1/2)
40            self.SetHoldings('SPY', -1/2)
41
42        self.spy_open_price = 0
43        self.fxi_open_price = 0