Investing Research Articles

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Aggregate Technological Innovation and Stock Market Returns

Does a surge in patent activity predict a surge in, or creative destruction of, equity value? To explore this question, assuming patent applications need not be approved to be exploited, we examine relationships between the growth rates of U.S. patent applications/patents as simple measures of innovation and U.S. stock market returns. Using U.S. patent activity (numbers of applications and patents) by calendar year and annual levels of  Shiller’s S&P Composite Index during 1871 through 2015  (142 years), we find that: Keep Reading

Value Strategy Update

We have updated the the monthly asset class ETF value strategy weights and associated performance data at Value Strategy.

Preliminary Value Strategy Update

The home page and “Value Strategy” now show preliminary asset class ETF value strategy positions for May 2016. There may be small shifts in allocations based on final data.

Simple Term Structure ETF/Mutual Fund Momentum Strategy

Does a simple relative momentum strategy applied to tradable U.S. Treasury term structure proxies produce attractive results by indicating the best duration for exploiting current interest rate trend? To investigate, we run short-term and long-term tests. The short-term test employs four exchange-traded funds (ETF) to represent the term structure:

SPDR Barclays 1-3 Month T-Bill (BIL)
iShares 1-3 Year Treasury Bond (SHY)
iShares Barclays 7-10 Year Treasury Bond (IEF)
iShares Barclays 20+ Year Treasury Bond (TLT)

The second test employs three Vanguard mutual funds to represent the term structure:

Vanguard Short-Term Treasury Fund (VFISX)
Vanguard Intermediate-Term Treasury Fund (VFITX)
Vanguard Long-Term Treasury Fund (VUSTX)

For each test, we allocate all funds at the end of each month to the fund with the highest total return over a specified ranking interval, ranging from one month to 12 months. To accommodate the longest ranking interval, portfolio formation commences 12 months after the start of the sample. We focus on compound annual growth rate (CAGR) and maximum drawdown (MaxDD) as key performance metrics. Using monthly dividend-adjusted closing prices for BIL, SHY, IEF and TLT since May 2007 and for VFISX, VFITX and VUSTX since October 1991, all through March 2016, we find that: Keep Reading

Momentum Strategy and Trading Calendar Updates

We have updated monthly asset class ETF momentum winners and associated performance data at Momentum Strategy.

We have updated the Trading Calendar to incorporate data for April 2016.

Weekly Summary of Research Findings: 4/25/16 – 4/29/16

Below is a weekly summary of our research findings for 4/25/16 through 4/29/16. These summaries give you a quick snapshot of our content the past week so that you can quickly decide what’s relevant to your investing needs.

Subscribers: To receive these weekly digests via email, click here to sign up for our mailing list. Keep Reading

Preliminary Momentum Strategy Update

The home page and “Momentum Strategy” now show preliminary asset class ETF momentum strategy positions for May 2016. Differences in past returns among the top places suggest that rankings are unlikely to change by the close.

SACEMS Portfolio-Asset Exclusion Testing

“Simple Asset Class ETF Momentum Strategy Universe Sensitivity” explores effects on basic strategy (Top 1) performance from excluding base set exchange-traded funds (ETF) one at a time. How do these exclusions affect the more diversified equally weighted top two (EW Top 2) and equally weighted top three (EW Top 3) portfolio variations? To investigate, we each month rank the following assets based on past return with one excluded (nine separate test sequences) and reform the Top 1, EW Top 2 and EW Top 3 portfolios:

PowerShares DB Commodity Index Tracking (DBC)
iShares MSCI Emerging Markets Index (EEM)
iShares MSCI EAFE Index (EFA)
SPDR Gold Shares (GLD)
iShares Russell 1000 Index (IWB)
iShares Russell 2000 Index (IWM)
SPDR Dow Jones REIT (RWR)
iShares Barclays 20+ Year Treasury Bond (TLT)
3-month Treasury bills (Cash)

The sample for the test starts with the first month all base set ETFs are available (February 2006). We focus on gross compound annual growth rate (CAGR) and gross maximum drawdown (MaxDD) as key performance statistics, ignoring monthly portfolio reformation costs. Using end-of-month total returns for the specified nine assets during February 2006 through March 2016, we find that: Keep Reading

SACEMS Portfolio-Asset Addition Testing

“Simple Asset Class ETF Momentum Strategy Universe Enhancers?” explores effects on basic strategy (Top 1) performance of adding 22 exchange-traded fund (ETF) or note (ETN) asset class proxies one at a time to the base set. How do these additions affect the more diversified equally weighted top two (EW Top 2) and equally weighted top three (EW Top 3) portfolio variations? To investigate, we again consider the following 22 ETFs/ETNs:

AlphaClone Alternative Alpha (ALFA)
JPMorgan Alerian MLP Index (AMJ)
Vanguard Total Bond Market (BND)
SPDR Barclays International Treasury Bond (BWX)
UBS ETRACS Wells Fargo Business Development Companies (BDCS)
iShares Core US Credit Bond (CRED)
First Trust US IPO Index (FPX)
PowerShares DB G10 Currency Harvest (DBV)
Guggenheim Frontier Markets (FRN)
iShares iBoxx High-Yield Corporate Bond (HYG)
iShares 7-10 Year Treasury Bond (IEF)
iPath DJ-UBS Copper Total Return Sub-Index (JJC)
PowerShares Closed-End Fund Income Composite (PCEF)
PowerShares Global Listed Private Equity (PSP)
IQ Hedge Multi-Strategy Tracker (QAI)
SPDR Dow Jones International Real Estate (RWX)
ProShares UltraShort S&P 500 (SDS)
iShares TIPS Bond (TIP)
United States Oil (USO)
VelocityShares Daily Inverse VIX Short-Term (XIV)
iPath S&P 500 VIX Short-Term Futures (VXX)
iPath S&P 500 VIX Medium-Term Futures (VXZ)

The base set consists of:

PowerShares DB Commodity Index Tracking (DBC)
iShares MSCI Emerging Markets Index (EEM)
iShares MSCI EAFE Index (EFA)
SPDR Gold Shares (GLD)
iShares Russell 1000 Index (IWB)
iShares Russell 2000 Index (IWM)
SPDR Dow Jones REIT (RWR)
iShares Barclays 20+ Year Treasury Bond (TLT)
3-month Treasury bills (Cash)

Each month, we rank the base set plus one of the additional ETFs/ETNs based on past return and reform the Top 1, EW Top 2 and EW Top 3 portfolios. The sample starts with the first month all base set ETFs are available (February 2006), but inceptions for most of the additional ETFs/ETNs are after this month. We focus on gross compound annual growth rate (CAGR) and gross maximum drawdown (MaxDD) as key performance statistics, ignoring monthly reformation costs. Using end-of-month total returns for the specified 31 assets as available during February 2006 through March 2016, we find that: Keep Reading

Commodity-Currency Interactions

Do commodity price changes predict currency exchange rate fluctuations for commodity-exporting countries? In their March 2016 paper entitled “When the Walk is Not Random: Commodity Prices and Exchange Rates”, Emanuel Kohlscheen, Fernando Avalos  and Andreas Schrimpf analyze relationships between commodity prices and exporter exchange rates. They first construct daily commodity export price indexes tailored to 11 commodity-exporting countries (Australia, Brazil, Canada, Chile, Colombia, Malaysia, Mexico, Norway, Peru, Russia, South Africa), encompassing 83 commodities (26 metal, 36 agricultural, 11 livestock, 10 energy). They then relate index levels to daily currency exchange rates by country. Using daily UN Comtrade statistics, commodity prices and currency exchange rates in U.S. dollars and Japanese yen as available during January 2004 (Malaysia starts in August 2005, and Russia starts in February 2009) through February 2015, they find that: Keep Reading

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Current Momentum Winners

ETF Momentum Signal
for May 2016 (Final)

Winner ETF

Second Place ETF

Third Place ETF

Gross Compound Annual Growth Rates
(Since August 2006)
Top 1 ETF Top 2 ETFs
11.3% 11.5%
Top 3 ETFs SPY
12.4% 7.2%
Strategy Overview
Current Value Allocations

ETF Value Signal
for May 2016 (Final)

Cash

IEF

LQD

SPY

The asset with the highest allocation is the holding of the Best Value strategy.
Gross Compound Annual Growth Rates
(Since September 2002)
Best Value Weighted 60-40
12.7% 9.8% 7.8%
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