Objective research to aid investing decisions

Value Investing Strategy (Strategy Overview)

Allocations for June 2024 (Final)

Momentum Investing Strategy (Strategy Overview)

Allocations for June 2024 (Final)
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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.

Simple Debt Class Mutual Fund Momentum Strategy

A subscriber requested validation of the performance of a simple momentum strategy that each month selects the best performing debt mutual fund based on total return over the past three months. To investigate, we test a simple strategy on the following 14 mutual funds, most of which have long histories:

T. Rowe Price New Income (PRCIX)
Thrivent Income A (LUBIX)
Vanguard GNMA Securities (VFIIX)
T. Rowe Price High-Yield Bonds (PRHYX)
T. Rowe Price Tax-Free High Yield Bonds (PRFHX)
Vanguard Long-Term Treasury Bonds (VUSTX)
T. Rowe Price International Bonds (RPIBX)
Fidelity Convertible Securities (FCVSX)
PIMCO Short-Term A (PSHAX)
Fidelity New Markets Income (FNMIX)
Eaton Vance Government Obligations C (ECGOX)
Franklin Floating Rate Daily Access A (FAFRX)
Vanguard Total Bond Market Index Adm (VBTLX)
Principal Spectrum Pref&Cptl Scs IncA (PPSAX)

We consider a strategy that allocates funds at the end of each month based on total returns over a specified ranking (lookback) interval to the Top 1, equal-weighted (EW) Top 2, EW Top 3, EW Top 4 or EW Top 5 funds. We determine the first winners in November 1988 so that at least nine funds are available for lookback interval sensitivity testing. As a benchmark, we use the equal-weighted and monthly rebalanced combination of all available funds (EW All). Using monthly dividend-adjusted closing prices for the 14 mutual funds from inceptions through April 2024, we find that: Keep Reading

Correlations of Stock and Bond Returns Globally

How should investors think about the correlation between stock market returns and bond market returns when constructing a diversified portfolio? In their April 2024 paper entitled “Stock-Bond Correlation: Theory & Empirical Results”, Lorenzo Portelli and Thierry Roncalli examine theoretical and empirical relationships between the stocks-bonds return correlation and other variables/conditions. They focus on:

  • Monthly returns of long-term government bonds and country stock markets (for example 10-year U.S. Treasury notes and the S&P 500 Index for the U.S.), but consider other choices for bond duration and stock portfolio.
  • 48-month rolling returns when assessing correlation dynamics.

Using government bond and country stock market returns for the U.S. during 1965 through 2023 and for other developed, developing and emerging markets across Europe, the Americas and Asian as available through 2023, they find that:

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Review of a Long-short Treasuries ETF Timing Strategy

After seeing “Review of the Quantified Market Psychology Strategy”, reader Steve Ruoff requested review of his U.S. Treasuries timing strategy as recorded at Timertrac (Duration Strategy), which approximately every four weeks generates allocations to: Direxion Daily 7-10 Year Treasury Bull 3X Shares (TYD); Direxion Daily 7-10 Year Treasury Bear 3X Shares (TYO); and cash, for which we use SPDR Bloomberg 1-3 Month T-Bill ETF (BIL). Strategy inputs encompass:

  1. Current economic activity, inflation metrics and monetary policy factors.
  2. Valuation estimates focused on long-term mean reversion thresholds.
  3. Technical rules focused on price momentum.

To investigate, we download the Timertrac trade history for the Duration Strategy and replicate its performance using the selected exchange-traded funds (ETF). We look at average trading activity, average trade return, standard deviation of trade returns, trade reward/risk (average return divided by standard deviation), compound annual growth rate (CAGR) and maximum drawdown (MaxDD) at the trade frequency. We look at buying and holding iShares 7-10 Year Treasury Bond ETF (IEF) as an alternative and also look at buying and holding SPDR S&P 500 ETF Trust (SPY). Using the Duration Strategy trade history and daily adjusted opening prices for all specified ETFs during mid-January 2014 through early March 2024, we find that: Keep Reading

Recent Interactions of Asset Classes with Effective Federal Funds Rate

How do returns of different asset classes recently interact with the Effective Federal Funds Rate (EFFR)? We focus on monthly changes (simple differences) in EFFR  and look at lead-lag relationships between change in EFFR 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 end-of-month EFFR and dividend-adjusted prices for the 10 ETFs during December 2007 (limited by EMB) through March 2024, we find that: Keep Reading

Predictable Monthly Pattern for TLT?

Does iShares 20+ Year Treasury Bond ETF (TLT) exhibit a predictable monthly pattern due to beginning-of-month dividends and mid-month U.S. government consumer and producer inflation releases? To investigate, we calculate average cumulative return for TLT across the month (from trading day 1 through trading day 23). We also investigate exploitability of findings. Using daily raw and dividend-adjusted levels of TLT from the end of July 2002 (inception) through January 2024 (21.5 years), we find that: Keep Reading

Treasury Yields and Inflation Lead-lag

Which comes first, adjustments in U.S. Treasuries yields across the term structure, or government announcement of new U.S. inflation data? To investigate, we relate monthly changes in yields for 1-year, 2-year, 3-year, 5-year, 7-year, 10-year, 20-year and 30-year U.S. Treasuries (GS1 through GS30) to monthly change in overall raw Consumer Price Index (CPI) for various leads and lags. Using monthly yields (average daily yields during a month) for Treasuries as available and monthly CPI during April 1953 through December 2023, we find that:

Keep Reading

FFR Actions, Stock Market Returns and Bond Yields

Do Federal Funds Rate (FFR) actions taken by the Federal Reserve open market operations committee reliably predict stock market and U.S. Treasuries yield reactions? To investigate, we use the S&P 500 Index (SP500) as a proxy for the stock market and the yield for the 10-Year U.S. Constant Maturity Treasury note (T-note). We look at index returns and changes in T-note yield during the one and two months after FFR actions, separately for FFR increases and FFR decreases. Using data for the three series during January 1990 through December 2023, we 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 2023, we find that:

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Volatility-adjusted Retirement Income Streams

Should investors consider portfolio volatility when choosing allocations to stocks and bonds in their retirement accounts? In his October 2023 paper entitled “Retirement Planning: The Volatility-Adjusted Coverage Ratio”, Javier Estrada introduces volatility-adjusted coverage ratio (VAC) as an alternative retirement portfolio metric. He defines this metric as coverage ratio (C, number of years of withdrawals supported relative to retirement period length) divided by annual portfolio volatility during retirement. He compares optimal stocks-bonds allocations for different fixed real annual withdrawal rates across 22 country markets and the world market using either C of VAC. For all markets and withdrawal rates, he uses historical returns for stocks and bonds with annual portfolio rebalancing and 30-year retirement periods. Using annual returns for stocks and bonds and annual inflation rates in the U.S. during 1872 through 2022 (Shiller data) and in 21 other countries during 1900 through 2019 (Dimson-Marsh-Staunton data), he finds that: Keep Reading

How Are TIPS ETFs Doing?

How do exchange-traded-funds (ETF) focused on Treasury Inflation-Protected Securities (TIPS) perform? To investigate, we consider ten of the largest TIP ETFs, all currently available, as follows:

As benchmarks, we consider iShares 1-3 Year Treasury Bond (SHY), iShares 3-7 Year Treasury Bond (IEI), iShares 7-10 Year Treasury Bond (IEF) and iShares 20+ Year Treasury Bond (TLT). To match duration of each TIPS ETF, we assign the one of these four benchmarks with the highest correlation of monthly returns. We focus on monthly return statistics, along with compound annual growth rates (CAGR) and maximum drawdowns (MaxDD). Using monthly returns for the 10 TIPS ETFs and the four benchmark ETFs as available, and concurrent monthly changes in the U.S. Consumer Price Index (CPI), through October 2023, we find that: Keep Reading

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