I already demonstrated in another article the flaws in the Bespoke study about buying SPY at the close and selling it on the next open. Basically, that study did not account for commissions and this effect alone completely changed the picture in favor of buy and hold.
In this post I consider the same strategy of buying on the close and selling on the next open for three popular ETFs, QQQQ, GLD and TLT, in the period 01/02/2008 to 02/09/2011. The objective of the analysis is to consider the impact of commissions on the performance of the simple strategy mentioned and to compare its returns to buy and hold returns.
The table below shows the cumulative return of the simple trading strategy in the period mentioned:
| ETF | Case A | Case B | Case C | B&H |
| QQQQ | 07/19/2010 (ruin date) | -11.65% | -16.90% | 16.8% |
| GLD | -69.43% | 43.00% | 44.85% | 56.8% |
| TLT | -80.40% | 9.88% | 11.17% | 4.1% |
Case A: 10K starting capital -$7 comm/trade, Case B: 100K starting capital -$7 comm/trade, Case C: 10K starting capital – $0.005 comm/share
It may be seen from the table that in the analysis period the buy and hold return of QQQQ is 16.8% excluding dividends. A trader with a $10K account paying $7 per trade as commissions would get ruined by 07/19/2010 and a trader with a $100k account paying the same commissions would have lost 11.65%. When commission is set to $0.005 per share then the return drops to -16.90%. Thus, this strategy of buying the close and selling next open would be a loser in the period considered for QQQQ although the buy and hold return was positive and about 17%, not counting dividends.
In the case of GLD, the $10K account paying $7 commission per trade is not ruined but the return is -69.43%. A total disaster given that the buy and hold return for this ETF in the analysis period is about 57%. Raising the starting capital to $100K while keeping commissions paid to $7 per trade produced a spectacular reversal to a 43% positive return. For a commission rate of $0.005 per share the return increased to about 45%. However, in both cases, the simple strategy return did not match that of buy and hold.
In the case of TLT, the $10K account with $7 commission per trade returned -80.40%. When the starting capital was raised to $100K the return was close to 10%. This increased to about 11.2% when commission rate was set to $0.005 per share. In both cases, the return was more than double the buy and hold return of 4.1%.
As a conclusion, for QQQQ the strategy failed, for GLD it did not match buy and hold in the best case considered and for TLT it did better than buy and hold, depending on commission rate. The important lesson to learn is that unless a trader is very sophisticated and uses sophisticated strategies, it is very difficult to beat buy and hold returns. Results like those reported in the Bespoke study, which did not account for commissions, are often due to selection bias.
