Bonds have two price components, yield and response of price to prevailing interest rates. How much of a return premium should investors in bonds expect? How can investors enhance this premium? These blog entries examine investing in bonds.

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Preliminary Value Strategy Update

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

SACEMS-SACEVS Mutual Diversification

Are the “Simple Asset Class ETF Value Strategy” (SACEVS) and the “Simple Asset Class ETF Momentum Strategy” (SACEMS) mutually diversifying. To check, we relate monthly returns for the SACEVS and the SACEMS exchange-traded fund (ETF) selections and look at the performance of an equally weighted portfolio of the two strategies, rebalanced monthly (50-50). Specifically, we consider: SACEVS Best Value paired with SACEMS Top 1; and, SACEVS Weighted paired with SACEMS Equally Weighted (EW) Top 3. Using monthly gross returns for SACEVS Best Value and SACEMS Top 1 since January 2003 and for SACEVS Weighted and SACEMS EW Top 3 since August 2006, all through November 2015, we find that: Keep Reading

Analyst Disagreement on Risk-free Rate and Equity Risk Premium

What do company valuation experts think about the level of the risk-free rate and the equity risk premium? In their October 2015 paper entitled “Huge Dispersion of the Risk-Free Rate and Market Risk Premium Used by Analysts in 2015”, Pablo Fernandez, Alberto Pizarro and Isabel Acín summarize assumptions about the risk-free rate (RF) and the market/equity risk premium (MRP or ERP) used by expert analysts to value companies in six countries (France, Germany, Italy, Spain, UK and U.S.). Using 156 company valuation reports from 2015, they find that: Keep Reading

Frontier Government Bonds as Diversifiers

Are frontier government bonds useful as incremental diversifiers of diversified portfolios? In their September 2015 paper entitled “Frontier and Emerging Government Bond Markets”, Vanja Piljak and Laurens Swinkels examine the diversification value of U.S. dollar-denominated frontier government bonds at aggregate, regional and country levels. They first look at return correlations and then consider mean-variance portfolio optimization with global equities, U.S. Treasury bonds, U.S. high-yield corporate bonds, emerging government bonds and frontier government bonds. Using weekly total returns in U.S. dollars for 29 frontier government bond markets in the J.P. Morgan Next Generation Markets Index and for other J.P. Morgan bond indexes and the MSCI All Country World Index during December 2001 through December 2013, they find that: Keep Reading

Best Bear Market Asset Class?

A subscriber asked which asset (short stocks, cash, bonds by subclass) is best to hold during equity bear markets, defined simply as intervals when SPDR S&P 500 (SPY) is below its 10-month simple moving average (SMA10). To investigate, we test the following nine alternatives, five of which are bond-like mutual funds and two of which are gold-related:

Short SPY
Cash, with return estimated as the yield on 13-week U.S. Treasury bills (T-bill)
Vanguard GNMA Securities (VFIIX)
T. Rowe Price International Bonds (RPIBX)
Vanguard Long-Term Treasury Bonds (VUSTX)
Fidelity Convertible Securities (FCVSX)
T. Rowe Price High-Yield Bonds (PRHYX)
Fidelity Select Gold Portfolio (FSAGX)
Spot Gold

Specifically, we compare monthly return statistics, cumulative performances and maximum drawdowns of these nine alternatives for months during which SPY is below its SMA10. Using monthly T-bill yield and monthly dividend-adjusted closing prices for the above assets during January 1993 (as limited by SPY) through August 2015, we find that: Keep Reading

Evaluating Country Investment Risk

How should global investors assess country risk? In his July 2015 paper entitled “Country Risk: Determinants, Measures and Implications – The 2015 Edition”, Aswath Damodaran examines country risk from multiple perspectives. He provides an overview of sources and measures of country risk, addressing both sovereign default risk and equity risk premiums. Based on a variety of sources and methods, he concludes that: Keep Reading

SACEVS Input Risk Premiums and FFR

The “Simple Asset Class ETF Value Strategy” seeks diversification across a small set of asset class exchanged-traded funds (ETF), plus a monthly tactical edge from potential undervaluation of three risk premiums:

  1. Term – monthly difference between the 10-year Constant Maturity U.S. Treasury note (T-note) yield and the 3-month Constant Maturity U.S. Treasury bill (T-bill) yield.
  2. Credit – monthly difference between the Moody’s Seasoned Baa Corporate Bonds yield and the T-note yield.
  3. Equity – monthly difference between S&P 500 operating earnings yield and the T-note yield.

Premium valuations are relative to historical averages. How might this strategy react to increases in the Federal Funds Rate (FFR)? Using end-of-month values of the three risk premiums, FFR, total 12-month U.S. inflation and core 12-month U.S. inflation during January 1990 (limited by availability of specific FFR targets) through June 2015 (306 months), we find that: Keep Reading

Effects of Execution Delay on SACEVS

“Effects of Execution Delay on Simple Asset Class ETF Momentum Strategy” investigates how delaying signal execution affects strategy performance. How does execution delay affect the performance of the Best Value and Weighted versions of the “Simple Asset Class ETF Value Strategy” (SACEVS)? These strategies each month allocate funds to the following asset class exchange-traded funds (ETF) according to valuations of term, credit and equity risk premiums, or to cash if no premiums are undervalued:

3-month Treasury bills (Cash)
iShares 7-10 Year Treasury Bond (IEF)
iShares iBoxx $ Investment Grade Corporate Bond (LQD)
SPDR S&P 500 (SPY)

To investigate, we compare 21 variations of each strategy that all use end-of-month (EOM) to determine the asset allocations but shift execution from the baseline EOM+1 close to subsequent closes up to EOM+21. For example, an EOM+5 variation uses an EOM cycle to determine allocations but delays execution until the close five trading days after EOM. Using daily dividend-adjusted closes for the above ETFs and daily yields for Cash during August 2002 through June 2015 (154 months), we find that:

Keep Reading

Simple Asset Class ETF Value Strategy

Does a simple relative value strategy applied to tradable asset class proxies produce attractive results? To investigate, we test a simple strategy on the following three asset class exchange-traded funds (ETF), plus cash:

3-month Treasury bills (Cash)
iShares 7-10 Year Treasury Bond (IEF)
iShares iBoxx $ Investment Grade Corporate Bond (LQD)
SPDR S&P 500 (SPY)

This set of ETFs relates to three factor risk premiums: (1) the difference in yields between Treasury bills and Treasury notes/bonds indicates the term risk premium; (2) the difference in yields between corporate bonds and Treasury notes/bonds indicates the credit (default) risk premium; and, (3) the difference in yields between equities and Treasury notes/bonds indicates the equity risk premium. We consider two alternative strategies for exploiting premium undervaluation: Best Value, which picks the most undervalued premium; and, Weighted, which weights all undervalued premiums according to degree of undervaluation. Based on the assets considered, the principal benchmark is a monthly rebalanced portfolio of 60% stocks and 40% U.S. Treasury notes (60-40 SPY-IEF). Using lagged quarterly S&P 500 earnings, end-of-month S&P 500 Index levels and end-of-month yields for the 3-month Constant Maturity U.S. Treasury bill (T-bill), the 10-year Constant Maturity U.S. Treasury note (T-note) and Moody’s Seasoned Baa Corporate Bonds during March 1989 through June 2015 (limited by availability of earnings data), and daily dividend-adjusted closing prices for the above three asset class ETFs during July 2002 through June 2015 (156 months, limited by availability of IEF and LQD), we find that: Keep Reading

SACEVS Modifications

We have made three changes to the “Simple Asset Class ETF Value Strategy” (SACEVS) based on results of  robustness tests and subscriber comments:

  1. To employ fresher data, we decrease the SACEVS S&P 500 Index level and bond/bill yield measurement interval from quarterly to monthly. S&P 500 Index operating earnings updates are still quarterly.
  2. To employ fresher data, we use end-of-measurement interval (end-of-month) bond/bill yields rather than average yields during the measurement interval.
  3. To account for a lag in availability of bill/bond yield data, we delay signal execution by one trading day.

These changes are logical, but introduce some additional noise. They result in somewhat higher risk-adjusted performance for SACEVS, at the expense of some additional trading. Effects on the Weighted version of the strategy are greater than those on the Best Value version.

We are updating “Value Strategy” and some related tests accordingly.

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Current Momentum Winners

ETF Momentum Signal
for February 2016 (Final)

Winner ETF

Second Place ETF

Third Place ETF

Gross Compound Annual Growth Rates
(Since August 2006)
Top 1 ETF Top 2 ETFs
11.5% 11.9%
Top 3 ETFs SPY
12.4% 6.5%
Strategy Overview
Current Value Allocations

ETF Value Signal
for February 2016 (Final)





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
12.4% 9.4% 7.6%
Strategy Overview
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