When arbitraging ETF holdings against the ETF, how does one manage the portfolio over time? Assume the strategy creates a long signal in pair A (stock X/ ETF) and a short signal in pair B ( stock Y / ETF). The hedge ratios are 0.5 for pair A and 2 for pair B so the following trades would get executed:
(+) 5 Shares Stock X (-) 10 Shares ETF
(-) 10 Shares Stock Y (+) 5 Shares ETF
The overall position would be + 5X, -5ETF, -10Y
Does that make sense so far?
Now lets assume the long signal for pair A weakens and the position is closed. In this case the 5 shares X would be sold and 10 shares ETF would be bought so that the new position now equals pair B.
I guess my question is : Is my train of thought right in that one can simply add these ETF positions or is there something I am overlooking ?