Objective research to aid investing decisions

Value Investing Strategy (Strategy Overview)

Allocations for September 2025 (Final)
Cash TLT LQD SPY

Momentum Investing Strategy (Strategy Overview)

Allocations for September 2025 (Final)
1st ETF 2nd ETF 3rd ETF

Bonds

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.

Do Convertible Bond ETFs Attractively Meld Stocks and Bonds?

Do exchange-traded funds (ETF) that hold convertible corporate bonds offer attractive performance? To investigate, we compare performance statistics for the following four convertible bond ETFs, all currently available, to those for a monthly rebalanced 60%-40% combination of SPDR S&P 500 ETF Trust (SPY) and iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD):

  1. SPDR Bloomberg Convertible Securities ETF (CWB)
  2. iShares Convertible Bond ETF (ICVT)
  3. First Trust SSI Strategic Convertible Securities ETF (FCVT)
  4. American Century Quality Convertible Securities ETF (QCON)

We focus on average return, standard deviation of returns, reward/risk (average return divided by standard deviation of returns), compound annual growth rate (CAGR) and maximum drawdown (MaxDD), all based on monthly data. Using monthly dividend-adjusted returns for all specified ETFs since inceptions and for SPY and LQD over matched sample periods through July 2025, we find that: Keep Reading

Evaluating Country Investment Risk

How should global investors assess country sovereign bond and equity risks? In his July 2025 paper entitled “Country Risk: Determinants, Measures and Implications – The 2025 Edition”, Aswath Damodaran examines country risk from multiple perspectives. To estimate a country risk premium, he considers direct and indirect measures of country government bond risk and country equity risk. Based on a variety of sources and methods, he concludes that: Keep Reading

Alpha Relative to Simple Diversified Portfolios

How much should investors who hold a conventionally diversified portfolio (stocks and bonds) be willing to pay for and an additional equity or bond fund that outperforms its benchmark (provides alpha)? In their May 2025 paper entitled “How Much Should You Pay for Alpha? Measuring the Value of Active Management with Utility Calculations”, Andrew Ang and Debarshi Basu estimate the amount an investor is willing to pay for access to an active equity or bond mutual fund, starting from an optimal stocks-bonds portfolio. Specifically, they:

  1. Empirically estimate investor risk aversion for a given stocks-bonds base portfolio, focusing on a 60-40 S&P 500 Total Return Index-Bloomberg US Aggregate Bond Index portfolio.
  2. Add one of 1,203 active U.S. large-capitalization mutual funds in the Morningstar database or one of 47 fixed income mutual funds in the Morningstar Core Plus US bond category to the base portfolio.
  3. For each added fund, compute the utility benefit (certainty equivalent or willingness-to-pay) of adding it.

For robustness, they repeat this analysis for different stocks-bonds base portfolios and different assumptions about equity-bond correlations. Using monthly returns for the selected indexes and mutual funds during January 2016 to December 2024, they find that: Keep Reading

Unstable Stocks-Bonds Return Correlations?

Should investors expect a negative correlation between stock market and bond market returns? In his February 2025 paper entitled “Rethinking the Stock-Bond Correlation”, Thierry Roncalli examines the stocks-bond return correlation from theoretical and empirical perspectives, employing a 4-year rolling window of monthly returns for the latter. Using both long-term and recent returns, he finds that: Keep Reading

Intricately Filtered Factor Portfolios

The performance of conventional factor portfolios, long and short extreme quantiles of assets sorted on the factor metric, faces considerable skepticism (see “Compendium of Live ETF Factor/Niche Premium Capture Tests”). Is their some more surgical way to capture theoretical factor premiums? In their March 2025 paper entitled “Investment Base Pairs”, Christian Goulding and Campbell Harvey offer a factor portfolio construction approach that confines portfolio long-short selections to pairs that most strongly exhibit value, momentum and carry premiums (base pairs). The approach identifies enduring pair relationships, not short-lived price gaps. Base pair identification derives from a combination of five variables:

  1. The correlation between an asset’s factor signal and its own subsequent return.
  2. The correlation between an asset’s factor signal and the paired asset’s subsequent return.
  3. The correlation between factor signals between paired assets.
  4. Differences in factor signal volatilities between paired assets.
  5. Differences in average signal levels between paired assets.

They apply this base pair identification approach by each month reforming long-short, leveraged portfolios of futures and forwards base pairs to generate 20-year backtests of 12 strategies: Equity Value, Bond Value, Currency Value, Commodity Value, Equity Momentum, Bond Momentum, Currency Momentum, Commodity Momentum, Equity Carry, Bond Carry, Currency Carry and Commodity Carry. They also look at strategy averages by class and factor, and overall (All). Benchmarks are comparable conventional strategies that rank assets only on a factor signal. Using monthly data for 64 liquid futures and forwards series (15 equities, 13 bonds, 9 currencies and 27 commodities) during January 1985 through September 2023, 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 February 2025, we find that: Keep Reading

Best Type of Account for TIPS Ladder

What is the best type of account to use for a Treasury Inflation Protected Securities (TIPS) ladder, constructed with incremental maturities to generate a constant risk-free stream of real future withdrawals via compounded inflation adjustments? In his February 2025 paper entitled “Best Asset Location for a TIPS Ladder”, Edward McQuarrie models TIPS behaviors and tax rules to determine whether investors should hold TIPS ladders in: a taxable brokerage account; a tax-deferred account such as a 401(k) or traditional IRA; or, a tax-free account such as a Roth IRA. Potential tax treatments of TIPS ladder account withdrawals include:

  1. Maturing principal (initial capital), which is not taxed.
  2. Ordinary income (coupon).
  3. Tax-favored income, such as qualified dividends or long-term capital gains, with a rate as low as half that for ordinary income.

Only taxable brokerage accounts encounter all three treatments. All withdrawals from tax-deferred accounts are treated as ordinary income. Roth withdrawals are always tax-free. His baseline case is a 20-year TIPS ladder with $1 million initial funding, assuming a 2% real coupon at purchase with all maturities and coupon payments occurring at year-end. He initially assumes a 3% annual inflation rate but considers rates varying from 1% to 9%. He focuses on a 24% income tax rate. He discusses Original Issue Discount (OID), unrealized inflation adjustments, which is crucial to differences in tax rates across account types. Based on this modeling, he concludes that:

Keep Reading

Recent Interactions of Asset Classes with Inflation (CPI)

How do returns of different asset classes recently interact with inflation as measured by monthly change in the not seasonally adjusted, all-items consumer price index (CPI) from the U.S. Bureau of Labor Statistics? To investigate, we look at lead-lag relationships between change in CPI and returns for each of the following 10 exchange-traded fund (ETF) asset class proxies:

  • Equities:
    • SPDR S&P 500 (SPY)
    • iShares Russell 2000 Index (IWM)
    • iShares MSCI EAFE Index (EFA)
    • iShares MSCI Emerging Markets Index (EEM)
  • Bonds:
    • iShares Barclays 20+ Year Treasury Bond (TLT)
    • iShares iBoxx $ Investment Grade Corporate Bond (LQD)
    • iShares JPMorgan Emerging Markets Bond Fund (EMB)
  • Real assets:
    • Vanguard REIT ETF (VNQ)
    • SPDR Gold Shares (GLD)
    • Invesco DB Commodity Index Tracking (DBC)

Using monthly total CPI values and monthly dividend-adjusted prices for the 10 specified ETFs during December 2007 (limited by EMB) through January 2025, we find that: Keep Reading

Using CME FedWatch to Time Bonds

Can investors get a trading edge from CME FedWatch, which tracks probabilities of changes to the Federal Funds Rate (FFR) at future FOMC meetings based on the prices of 30-day Fed Funds futures contracts? In their January 2025 paper entitled “Watching the FedWatch”, flagged by a subscriber, Stefano Bonini, Shengyu Huang and Majeed Simaan compare FFR forecasts from a simple model based on CME FedWatch to conventional model forecasts based on Fed Funds futures. They conduct statistical backtests of forecast accuracies during May 1994 through March 2024 (232 scheduled FOMC meetings). They then compare economic values of the two forecasts via two trading strategies that, 30 days before each scheduled FOMC meeting from the end of 2009 through 2023:

  1. If the forecast is for a rate cut or no change (a rate increase), takes a long (short) position in Fed Funds futures contracts set to expire in the month of the next FOMC meeting.
  2. If the forecast is for a rate cut or no change (a rate increase), takes a long (short) position in iShares Core U.S. Aggregate Bond ETF, AGG. After release of the actual rate decision, if the forecast is wrong, they close the AGG position.

Using daily values of specified variables over the ranges stated above, they find that: Keep Reading

Ziemba Party Holding Presidency Strategy Update

“Exploiting the Presidential Cycle and Party in Power” summarizes strategies that hold small stocks (large stock or bonds) when Democrats (Republicans) hold the U.S. presidency. How has this strategy performed in recent years? To investigate, we consider three strategy alternatives using exchange-traded funds (ETF):

  1. D-IWM:R-SPY: hold iShares Russell 2000 (IWM) when Democrats hold the presidency and SPDR S&P 500 (SPY) when Republicans hold it.
  2. D-IWM:R-LQD: hold IWM when Democrats hold the presidency and iShares iBoxx Investment Grade Corporate Bond (LQD) when Republicans hold it.
  3. D-IWM:R-IEF: hold IWM when Democrats hold the presidency and iShares 7-10 Year Treasury Bond (IEF) when Republicans hold it.

We use calendar years to determine party holding the presidency. As benchmarks, we consider buying and holding each of SPY, IWM, LQD or IEF and annually rebalanced portfolios of 60% SPY and 40% LQD (60 SPY-40 LQD) or 60% SPY and 40% IEF (60 SPY-40 IEF). We consider as performance metrics: average annual excess return (relative to the yield on 1-year U.S. Treasury notes at the beginning of each year); standard deviation of annual excess returns; annual Sharpe ratio; compound annual growth rate (CAGR); and, maximum annual drawdown (annual MaxDD). We assume portfolio switching/rebalancing frictions are negligible. Except for CAGR, computations are for full calendar years only. Using monthly dividend-adjusted closing prices for the specified ETFs during July 2002 (limited by LQD and IEF) through December 2024, we find that:

Keep Reading

Login
Daily Email Updates
Filter Research
  • Research Categories (select one or more)