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Investing Research Articles

Gold Price Drivers?

What drives the price of gold: inflation, interest rates, stock market behavior, public sentiment? To investigate, we relate monthly and annual spot gold return to changes in:

We start testing in 1975 because: “On March 17, 1968, …the price of gold on the private market was allowed to fluctuate…[, and] in 1975…the price of gold was left to find its free-market level.” We lag CPI measurements by one month to ensure they are known to the market when calculating gold return. Using monthly data from December 1974 (March 1978 for consumer sentiment) through July 2019, we find that: Keep Reading

S&P 500 Volatility Indexes as an Asset Class

Should investors consider allocations to products that track equity volatility indexes? In her July 2019 paper entitled “Challenges of Indexation in S&P 500 Index Volatility Investment Strategies”, Margaret Sundberg examines whether behaviors of S&P 500 Index option-based volatility indexes justify treatment of volatility as an asset class. To assess potential strategies, she employs the following indexes:

Using daily time series for these indexes during April 2008 through March 2019, she finds that: Keep Reading

Day Trading a Bust?

Can individual investors make a living by day trading? In their July 2019 paper entitled “Day Trading for a Living?”, Fernando Chague, Rodrigo De-Losso and Bruno Giovannetti analyze performances of all Brazilian retail investors who begin trading futures on the main Brazilian stock index during 2013 through 2015 and persist in this trading for at least 300 sessions. They use data for 2012 to identify beginners, and they use data for 2016-2017 to extend performance evaluations for at least two years of trading. They consider performance both gross and net of exchange and brokerage fees, but they ignore income taxes and expenses such as courses and trading platforms. They employ subsamples and regressions to measure learning while trading. Using trading records for the specified index futures by all Brazilian investors during 2012 through 2017, they find that: Keep Reading

Weekly Summary of Research Findings: 8/12/19 – 8/16/19

Below is a weekly summary of our research findings for 8/12/19 through 8/16/19. 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

Are Stock Quality ETFs Working?

Are stock quality strategies, as implemented by exchange-traded funds (ETF), attractive? To investigate, we consider four ETFs, all currently available (from oldest to youngest):

  • Invesco S&P 500 Quality ETF (SPHQ) – seeks to track performance of S&P 500 stocks with the highest quality scores based on firm return on equity, accruals ratio and financial leverage ratio, reformed semi-annually.
  • iShares Edge MSCI USA Quality Factor ETF (QUAL) – seeks to track performance of U.S. large-capitalization and mid-capitalization stocks selected based return on firm equity, earnings variability and debt-to-equity.
  • Fidelity Quality Factor ETF (FQAL) – seeks to track performance of U.S. large-capitalization and mid-capitalization stocks with a higher firm quality profile than the broader market.
  • Vanguard U.S. Quality Factor ETF (VFQY) – applies a rules-based quantitative model to select U.S. common stocks with strong fundamentals (strong profitability and healthy balance sheets) across market capitalizations, sectors and industry groups.

Because some available sample periods are very short, we focus on daily return statistics, along with cumulative returns and maximum drawdowns. We use three benchmarks according to fund descriptions: SPDR S&P 500 (SPY), Vanguard Russell 1000 Index Fund ETF (VONE) and iShares Russell 3000 ETF (IWV). Using daily returns for the four stock quality ETFs and benchmarks as available through most of July 2019, we find that: Keep Reading

Small Business Owner Sentiment and the U.S. Stock Market

Throughout each month, the National Federation of Independent Businesses surveys members on ten components of business conditions they anticipate six months hence. They issue findings on the second Tuesday of the following month in “Small Business Economic Trends”, including a Small Business Optimism Index (SBOI). Are the expectations of responding small business owners a “grass roots” predictor of U.S. stock market behavior? To check, we relate changes in SBOI to U.S. stock market returns. Using monthly levels of SBOI, the S&P 500 Index (a proxy for the U.S. stock market) and the Russell 2000 Index (representing smaller stocks) during January 2003 through June 2019 (198 months), we find that: Keep Reading

Equity Factor Time Series Momentum

In their July 2019 paper entitled “Momentum-Managed Equity Factors”, Volker Flögel, Christian Schlag and Claudia Zunft test exploitation of positive first-order autocorrelation (time series, absolute or intrinsic momentum) in monthly excess returns of seven equity factor portfolios:

  1. Market (MKT).
  2. Size – small minus big market capitalizations (SMB).
  3. Value – high minus low book-to-market ratios (HML).
  4. Momentum – winners minus losers (WML)
  5. Investment – conservative minus aggressive (CMA).
  6. Operating profitability – robust minus weak (RMW).
  7. Volatility – stable minus volatile (SMV).

For factors 2-7, monthly returns derive from portfolios that are long (short) the value-weighted fifth of stocks with the highest (lowest) expected returns. In general, factor momentum timing means each month scaling investment in a factor from 0 to 1 according its how high its last-month excess return is relative to an inception-to-date window of past levels. They consider also two variations that smooth the simple timing signal to suppress the incremental trading that it drives. In assessing costs of this incremental trading, they assume (based on other papers) that realistic one-way trading frictions are in the range 0.1% to 0.5%. Using monthly data for a broad sample of U.S. common stocks during July 1963 through November 2014, they find that: Keep Reading

SACEVS Input Risk Premiums and EFFR

The “Simple Asset Class ETF Value Strategy” (SACEVS) 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 changes in the Effective Federal Funds Rate (EFFR)? Using end-of-month values of the three risk premiums, EFFRtotal 12-month U.S. inflation and core 12-month U.S. inflation during March 1989 (limited by availability of operating earnings data) through June 2019, we find that: Keep Reading

Federal Reserve Treasuries Holdings and Asset Returns

Is the level, or changes in the level, of Federal Reserve (Fed) holdings of U.S. Treasuries (bills, notes, bonds and TIPS, measured weekly as of Wednesday) an indicator of future stock market and/or Treasuries returns? To investigate, we take dividend-adjusted SPDR S&P 500 (SPY) and iShares Barclays 20+ Year Treasury Bond (TLT) as tradable proxies for the U.S. stock and Treasuries markets, respectively. Using weekly Fed holdings of Treasuries, SPY and TLT during mid-December 2002 through mid-July 2019, we find that: Keep Reading

Weekly Summary of Research Findings: 8/5/19 – 8/9/19

Below is a weekly summary of our research findings for 8/5/19 through 8/9/19. 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

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