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Value Allocations for Mar 2019 (Final)
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Momentum Allocations for Mar 2019 (Final)
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Weekly Summary of Research Findings: 3/18/19 – 3/22/19

Below is a weekly summary of our research findings for 3/18/19 through 3/22/19. 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

SACEMS with Three Copies of Cash

Subscribers have questioned selecting assets with negative past returns within the “Simple Asset Class ETF Momentum Strategy” (SACEMS). Inclusion of Cash as one of the assets in the SACEMS universe of exchange-traded funds (ETF) prevents the SACEMS Top 1 portfolio from holding an asset with negative past returns. To test full dual momentum versions of SACEMS equally weighted (EW) Top 2 and EW Top 3 SACEMS portfolios, we add two more copies of Cash to the universe, thereby preventing both of them from holding assets with negative past returns. The SACEMS universe thus becomes:

PowerShares DB Commodity Index Tracking (DBC)
iShares MSCI Emerging Markets Index (EEM)
iShares MSCI EAFE Index (EFA)
SPDR Gold Shares (GLD)
iShares Russell 2000 Index (IWM)
SPDR S&P 500 (SPY)
iShares Barclays 20+ Year Treasury Bond (TLT)
Vanguard REIT ETF (VNQ)
3-month Treasury bills (Cash)
3-month Treasury bills (Cash)
3-month Treasury bills (Cash)

We focus on the effects of adding two copies of Cash on compound annual growth rates (CAGR) and maximum drawdowns (MaxDD) of SACEMS EW Top 2 and EW Top 3 portfolios. Using monthly dividend adjusted closing prices for the asset class proxies and the yield for Cash during February 2006 (the earliest all ETFs are available) through February 2019, we find that: Keep Reading

Measuring the Value Premium with Value and Growth ETFs

Do popular style-based exchange-traded funds (ETF) offer a reliable way to exploit the value premium? To investigate, we compare differences in returns (value-minus-growth, or V – G) for each of the following three matched pairs of value-growth ETFs:

  • iShares Russell 2000 (Smallcap) Growth Index (IWO)
  • iShares Russell 2000 (Smallcap) Value Index (IWN)
  • iShares Russell Midcap Growth Index (IWP)
  • iShares Russell Midcap Value Index (IWS)
  • iShares Russell 1000 (Largecap) Growth Index (IWF)
  • iShares Russell 1000 (Largecap) Value Index (IWD)

To aggregate, we define monthly value return as the equally weighted average monthly return of IWN, IWS and IWD and monthly growth return as the equally weighted average monthly return of IWO, IWP and IWF. Using monthly dividend-adjusted closing prices for these ETFs during August 2001 (limited by IWP and IWS) through February 2019, we find that: Keep Reading

ISM PMI and Future Junk Bond Returns?

A subscriber asked about the validity of the assertion in “The Daily Shot” of February 26, 2019 (The Wall Street Journal) that “recent weakness in the ISM [Institute for Supply Management] Manufacturing PMI [Purchasing Managers’ Index] index points to downside risks for high-yield debt.” Such a relationship might support a strategy of switching between high-yield bonds and cash, or high-yield bonds and U.S. Treasuries, based on PMI data. To investigate, we consider the following two pairs of funds:

  1. Vanguard High-Yield Corporate (VWEHX) and Vanguard Long-Term Treasury (VUSTX) since May 1986 (limited by VUSTX).
  2. iShares iBoxx High Yield Corp Bond (HYG) and iShares 7-10 Year Treasury Bond (IEF) since April 2007 (limited by HYG).

We consider both statistical tests and strategies that each month (per the PMI release frequency) holds high-yield bonds or cash, or high-yield bonds or Treasuries, according to whether the prior-month change in PMI is positive or negative. We use the 3-month U.S. Treasury bill (T-bill) yield as a proxy for return on cash. Using fund monthly total returns as available and monthly seasonally adjusted PMI data for January 1950 through January 2016 from the Federal Reserve Bank of St. Louis (discontinued and removed) and from press releases thereafter, all through February 2019, we find that: Keep Reading

Measuring the Size Effect with Capitalization-based ETFs

Do popular capitalization-based exchange-traded funds (ETF) offer a reliable way to exploit an equity size effect? To investigate, we compare the difference in returns (small minus big) between:

  • iShares Russell 2000 Index (Smallcap) Index (IWM), and
  • SPDR S&P 500 (SPY)

Using monthly dividend-adjusted closing prices for these ETFs during May 2000 (limited by IWM) through February 2019, we find that: Keep Reading

Consumer Inflation Expectations Predictive?

A subscriber noted and asked: “Michigan (at one point) claimed that the inflation expectations part of their survey of consumers was predictive. That was from a paper long ago. I wonder if it is still true.” To investigate, we relate “Expected Changes in Prices During the Next Year” (expected annual inflation) from the monthly final University of Michigan Survey of Consumers and actual U.S. inflation data based on the monthly non-seasonally adjusted consumer price index (U.S. All items, 1982-84=100). The University of Michigan releases final survey data near the end of the measured month, and the long-turn historical expected inflation series presents a 3-month simple moving average (SMA3) of monthly measurements. We consider two relationships:

  • Expected annual inflation versus one-year hence actual annual inflation.
  • Monthly change in expected  annual inflation versus monthly change in actual annual inflation.

As a separate (investor-oriented) test, we relate monthly change in expected annual inflation to next-month total returns for SPDR S&P 500 (SPY) and iShares Barclays 20+ Year Treasury Bond (TLT). Using monthly survey/inflation data since March 1978 (limited by survey data) and monthly SPY and TLT total returns since July 2002 (limited by TLT), all through January 2019, we find that: Keep Reading

Weekly Summary of Research Findings: 3/11/19 – 3/15/19

Below is a weekly summary of our research findings for 3/11/19 through 3/15/19. 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

Optimal Monthly Cycle for SACEMS?

Is there a best time of the month for measuring momentum within the Simple Asset Class ETF Momentum Strategy (SACEMS)? This strategy each month picks winners from the following set of exchange-traded funds (ETF) based on total returns over a specified lookback interval:

PowerShares DB Commodity Index Tracking (DBC)
iShares MSCI Emerging Markets Index (EEM)
iShares MSCI EAFE Index (EFA)
SPDR Gold Shares (GLD)
iShares Russell 2000 Index (IWM)
SPDR S&P 500 (SPY)
iShares Barclays 20+ Year Treasury Bond (TLT)
Vanguard REIT ETF (VNQ)
3-month Treasury bills (Cash)

To investigate, we compare 21 variations of the strategy based on shifting the monthly return calculation cycle relative to trading days from the end of the month (EOM). For example, an EOM+5 cycle ranks assets based on closing prices five trading days after EOM each month. We focus on gross compound annual growth rate (CAGR) and gross maximum drawdown (MaxDD) as key performance statistics for the Top 1, equally weighted (EW) Top 2 and EW Top 3 portfolios of monthly winners. Using monthly total (dividend-adjusted) returns for the specified assets during mid-February 2006 (limited by DBC) through mid-February 2019, we find that: Keep Reading

Relative Wealth Effects on Investors

How does investor competitiveness (a goal of relative rather than absolute wealth) affect optimal allocations? In their February 2019 paper entitled “The Growth of Relative Wealth and the Kelly Criterion”, Andrew Lo, Allen Orr and Ruixun Zhang compare optimal portfolios for maximizing relative wealth versus absolute wealth at both short and long investment horizons. They define an individual’s relative wealth as fraction held of total wealth of all investors. Their model assumes that investors allocate to two assets, one risky and one riskless. They identify when an investor should allocate according to the Kelly criterion (series of allocations that maximize terminal wealth over the long run) and when the investor should deviate from it. Based on derivations and modeling, they conclude that:

Keep Reading

SACEMS Top 1 Mean Reversion?

Subscribers asked whether the monthly winner (Top 1) of the Simple Asset Class ETF Momentum Strategy (SACEMS) is more prone to mean reversion than momentum, thereby justifying its exclusion from or lower weight within SACEMS portfolios. SACEMS each month picks winners from the following universe of eight asset class exchange-traded funds (ETF), plus cash:

PowerShares DB Commodity Index Tracking (DBC)
iShares MSCI Emerging Markets Index (EEM)
iShares MSCI EAFE Index (EFA)
SPDR Gold Shares (GLD)
iShares Russell 2000 Index (IWM)
SPDR S&P 500 (SPY)
iShares Barclays 20+ Year Treasury Bond (TLT)
Vanguard REIT ETF (VNQ)
3-month Treasury bills (Cash)

To investigate, we review relevant past research and conduct in-depth robustness tests of SACEMS monthly returns and volatilities across all ranks 1 through 9 and ranking (lookback) intervals one to 12 months. Limited by availability of DBC (inception February 2006) and a 12-month lookback interval, we start the comparison with March 2007. Using monthly dividend adjusted closing prices for the asset class proxies and the yield for Cash during February 2006 through February 2019, we find that: Keep Reading

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