Objective research to aid investing decisions

Value Investing Strategy (Strategy Overview)

Allocations for August 2022 (Final)
Cash TLT LQD SPY

Momentum Investing Strategy (Strategy Overview)

Allocations for August 2022 (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.

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 monthly EFFR and monthly dividend-adjusted prices for the 10 specified ETFs during December 2007 (limited by EMB) through December 2021, we find that: Keep Reading

Recent Interactions of Asset Classes with Economic Policy Uncertainty

How do returns of different asset classes recently interact with uncertainty in government economic policy as quantified by the Economic Policy Uncertainty (EPU) Index? This index at the beginning of each month incorporates from the prior month:

  1. Coverage of policy-related economic uncertainty by prominent newspapers (50% weight).
  2. Number of temporary federal tax code provisions set to expire in future years (one sixth weight).
  3. Level of disagreement in one-year forecasts among participants in the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters for both (a) the consumer price index (one sixth weight) and (b) purchasing of goods and services by federal, state and local governments (one sixth weight).

Because the historical EPU Index series includes substantial revisions to prior months, we focus on monthly percentage changes in EPU Index and look at lead-lag relationships between change in EPU Index 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 levels of the EPU Index and monthly dividend-adjusted prices for the 10 specified ETFs during December 2007 (limited by EMB) through December 2021, we find that: Keep Reading

Recent Interactions of Asset Classes with Inflation (PPI)

How do returns of different asset classes recently interact with inflation as measured by monthly change in the not seasonally adjusted, all-commodities producer price index (PPI) from the U.S. Bureau of Labor Statistics? To investigate, we look at lead-lag relationships between change in PPI 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 PPI values and monthly dividend-adjusted prices for the 10 specified ETFs during December 2007 (limited by EMB) through December 2021, we find 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 December 2021, 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 2021, 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 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 late December 2021, we find that:

Keep Reading

Add REITs to SACEVS?

What happens if we extend the “Simple Asset Class ETF Value Strategy” (SACEVS) with a real estate risk premium, derived from the yield on equity Real Estate Investment Trusts (REIT), represented by the FTSE NAREIT Equity REITs Index? To investigate, we apply the SACEVS methodology to the following asset class exchange-traded funds (ETF), plus cash:

3-month Treasury bills (Cash)
iShares 20+ Year Treasury Bond (TLT)
iShares iBoxx $ Investment Grade Corporate Bond (LQD)
SPDR Dow Jones REIT (RWR) through September 2004 dovetailed with Vanguard REIT ETF (VNQ) thereafter
SPDR S&P 500 (SPY)

This set of ETFs relates to four risk premiums, as specified below: (1) term; (2) credit (default); (3) real estate; and, (4) equity. We focus on effects of adding the real estate risk premium on gross compound annual growth rates (CAGR), maximum drawdowns (MaxDD) and annual Sharpe ratios of the Best Value (picking the most undervalued premium) and Weighted (weighting all undervalued premiums according to degree of undervaluation) versions of SACEVS. Using lagged quarterly S&P 500 earnings, monthly S&P 500 Index levels and monthly yields for 3-month U.S. Treasury bill (T-bill), the 10-year Constant Maturity U.S. Treasury note (T-note), Moody’s Seasoned Baa Corporate Bonds and FTSE NAREIT Equity REITs Index since March 1989 (limited by availability of earnings data), and monthly dividend-adjusted closing prices for the above asset class ETFs since July 2002, all through November 2021, 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, and SPY and TLT total returns during mid-December 2002 through mid-November 2021, we find that: Keep Reading

SACEVS with Quarterly Allocation Updates

Do quarterly allocation updates for the Best Value and Weighted versions of the “Simple Asset Class ETF Value Strategy” (SACEVS) work as well as monthly updates? These strategies 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 20+ Year Treasury Bond (TLT)
iShares iBoxx $ Investment Grade Corporate Bond (LQD)
SPDR S&P 500 (SPY)

Changing from monthly to quarterly allocation updates does not sacrifice information about lagged quarterly S&P 500 Index earnings, but it does sacrifice currency of term and credit premiums. To assess alternatives, we compare cumulative performances and the following key metrics for quarterly and monthly allocation updates: gross compound annual growth rate (CAGR), gross maximum drawdown (MaxDD), annual gross returns and volatilities and annual gross Sharpe ratios. Using monthly dividend-adjusted closes for the above ETFs during September 2002 (earliest alignment of months and quarters) through September 2021, we find that:

Keep Reading

Quit Rate and Future Asset Returns

Does the U.S. employment quit rate, a measurement from the Job Openings and Labor Turnover Survey run monthly by the U.S. Bureau of Labor Statistics, have implications for future U.S. stock market or U.S. Treasury bond return? A high (low) quit rate may indicate a strong (weak) economy and/or may signal high (low) wage inflation. To investigate, we relate quit rate to future performance of SPDR S&P 500 (SPY) as a proxy for the stock market and of iShares 20+ Year Treasury Bond (TLT) as a proxy for government bonds. Using monthly quit rate (which has a release delay of about six weeks) during December 2000 through August 2021 and monthly dividend-adjusted returns for SPY and TLT as available during December 2000 through September 2021, we find that: Keep Reading

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