Test of Seasonal Risk Adjustment Strategy

A subscriber requested review of a strategy that seeks to exploit "Sell in May" by switching between risk-on assets during November-April and risk-off assets during May-October, with assets specified as follows:

• Risk-on - SPDR S&P 500 (SPY), iShares Russell 2000 Index (IWM) and Invesco DWA Technical Leaders (PDP).
• Risk-off - iShares Barclays 20+ Year Treas Bond (TLT) and Invesco S&P 500 Low Volatility (SPLV).

On each portfolio switch date, assets receive equal weight with 0.25% overall penalty for trading frictions. We focus on compound annual growth rate (CAGR), maximum drawdown (MaxDD) measured at 6-month intervals and Sharpe ratio measured at 6-month intervals as key performance statistics. As benchmarks, we consider buying and holding SPY, IWM or TLT and a 60%-40% SPY-TLT portfolio rebalanced frictionlessly at the ends of April and October (60-40). Using April and October dividend-adjusted closes of SPY, IWM, PDP, TLT and SPLV as available during October 2002 (first interval with at least one risk-on and one risk-off asset) through April 2023, and contemporaneous 6-month U.S. Treasury bill (T-bill) yield as the risk-free rate, we find that: