Strategic Allocation

A subscriber asked whether more granularity in international equity choices for the “Simple Asset Class ETF Momentum Strategy” (SACEMS) would improve performance. To investigate, we augment/replace international developed and emerging equity market exchange-traded funds (ETF) such that the universe of assets becomes:

• SPDR S&P 500 (SPY)
• iShares Russell 2000 Index (IWM)
• iShares Europe (IEV)
• iShares MSCI Japan (EWJ)
• iShares MSCI Pacific ex Japan (EPP)
• iShares MSCI Emerging Markets Index (EEM)
• iShares JPMorgan Emerging Markets Bond Fund (EMB)
• iShares Latin America 40 (ILF)
• iShares Barclays 20+ Year Treasury Bond (TLT)
• Vanguard REIT ETF (VNQ)
• SPDR Gold Shares (GLD)
• Invesco DB Commodity Index Tracking (DBC)
• 3-month Treasury bills (Cash)

We compare original (SACEMS Base) and modified (SACEMS Granular), each month picking winners from their respective sets of ETFs based on total returns over a fixed lookback interval. We focus on gross compound annual growth rate (CAGR), maximum drawdown (MaxDD) and gross annual Sharpe ratio (average annual excess return divided by standard deviation of annual excess returns, using average monthly T-bill yield during a year to calculate excess returns) as key performance statistics for the Top 1, equally weighted (EW) Top 2 and EW Top 3 portfolios of monthly winners. Using monthly total (dividend-adjusted) returns for the specified assets during February 2006 through February 2026, we find that: Keep Reading

A subscriber requested a test of Ray Dalio‘s All Weather (AW) portfolio with different rebalancing frequencies, allocated to exchange-traded funds (ETF) as asset class proxies as follows:

30% – Vanguard Total Stock Market (VTI)
40% – iShares 20+ Year Treasury (TLT)
15% – iShares 7-10 Year Treasury (IEF)
7.5% – SPDR Gold Shares (GLD)
7.5% – Invesco DB Commodity Tracking (DBC)

To investigate, we test:

• AW portfolios rebalanced monthly (AW-1), quarterly (AW-3), semiannually at the ends of June and December (AW-6) or annually at the end of December (AW-12).
• As a benchmark, a 60%-40% VTI-TLT portfolio rebalanced annually (60/40-12).
• For comparison, the Simple Asset Class ETF Momentum Strategy equally weighted Top 2 portfolio (SACEMS EW Top 2), the Simple Asset Class ETF Value Strategy (SACEVS) Best Value portfolio and a 50%-50% combination of these two portfolios (SACEVS-SACEMS 50-50).

We consider the following gross performance metrics, all based on monthly measurements: average monthly return, standard deviation of monthly returns, compound annual growth rate (CAGR), maximum drawdown (MaxDD) and Sharpe ratio (with the 3-month Treasury bill yield as the risk-free rate). We also compare number of rebalance actions for each portfolio. Using monthly dividend-adjusted returns for the specified assets during February 2006 (limited by DBC) through January 2026, we find that: Keep Reading

Can investors use leveraged exchange-traded funds (ETF) to construct attractive versions of simple 60%/40% (60/40) and 40%/60% (40/60) stocks-bonds portfolios? In their March 2020 presentation package entitled “Robust Leveraged ETF Portfolios Extending Classic 40/60 Portfolios and Portfolio Insurance”, flagged by a subscriber, Mikhail Smirnov and Alexander Smirnov consider several variations of classic stocks/bonds portfolios implemented with leveraged ETFs. They ultimately focus on a monthly rebalanced partially 3X-leveraged portfolio consisting of:

• 40% ProShares UltraPro QQQ (TQQQ)
• 20% Direxion Daily 20+ Year Treasury Bull 3X Shares (TMF)
• 40% iShares 20+ Year Treasury Bond ETF (TLT)

To validate findings, we consider this portfolio and several 60/40 and 40/60 stocks/bonds portfolios. We look at net monthly performance statistics, along with compound annual growth rate (CAGR), maximum drawdown (MaxDD) based on monthly data and annual Sharpe ratio. To estimate monthly rebalancing frictions, we use 0.5% of amount traded each month. We use average monthly 3-month U.S. Treasury bill yield during a year as the risk-free rate in Sharpe ratio calculations for that year. Using monthly adjusted prices for TQQQ, TMF, TLT and for SPDR S&P 500 ETF Trust (SPY) and Invesco QQQ Trust (QQQ) to construct benchmarks during February 2010 (limited by TQQQ inception) through January 2026, we find that: Keep Reading

A subscriber requested review of the Golden Butterfly (GB) portfolio, which assigns equal weights to the total stock market, small-capitalization value stocks, long-term government bonds, short-term government bonds and gold. To investigate, we use the following exchange-traded funds (ETF) as asset class proxies, respectively:

• Vanguard Total Stock Market Index Fund (VTI)
• iShares S&P Small-Cap 600 Value Fund (IJS)
• iShares Barclays 20+ Year Treasury Bond (TLT)
• iShares 1-3 Year Treasury Bond (SHY)
• SPDR Gold Shares (GLD)

We consider either monthly or annual rebalancings to equal weight, ignoring associated trading frictions. Using monthly dividend-adjusted prices for the five ETFs during November 2004 (limited by GLD) through January 2026, we find that: Keep Reading

We have updated monthly allocations and performance data for the Simple Asset Class ETF Momentum Strategy (SACEMS) and the Simple Asset Class ETF Value Strategy (SACEVS). We have also updated performance data for the Combined Value-Momentum Strategy.

We have updated the Trading Calendar to incorporate data for February 2026.

The home page, Simple Asset Class ETF Momentum Strategy (SACEMS) and Simple Asset Class ETF Value Strategy (SACEVS) now show preliminary positions for March 2026. SACEMS rankings for positions 2 and 3 are somewhat close, so they could flip by the close. SACEVS allocations are unlikely to change by the close.

What does very long term experience say about the best way to protect a conventional global 60% equities-40% bonds (60/40) portfolio against drawdowns? In their November 2025 paper entitled “The Best Defensive Strategies: Two Centuries of Evidence”, Guido Baltussen, Martin Martens and Lodewijk van der Linden use 220 years of data to compare downside protection alternatives for a 60/40 portfolio. They consider trend-following (return from 12 months ago to one month ago), gold, bonds, U.S. Treasuries, put options and low-risk, quality and value equity factors (over a shorter sample period). They further evaluate two more complex strategies that are long and short subsets of 25 equity, bond, commodity and currency long/short factors based on their respective rolling 60-month return correlations with the 60/40 portfolio:

1. Defensive Absolute Return (DAR) – each month long (short) the equal-weighted third of factors with the lowest (highest) rolling correlations.
2. Return-improving DAR (DAR4020) – each month long (short) the equal-weighted 40% of factors with the lowest rolling correlations (20% of factors with the highest).

All factors are available by 1878. All factors incorporate a 10% annualized volatility target based on rolling 10-year past volatility. Using estimated monthly returns in U.S. dollars for asset classes and DAR factor returns as described above during December 1799 through December 2021, they find that:

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“Simplified Offensive, Defensive and Risk Mode Identification Momentum Strategy” and “Size Effect-based Hybrid Asset Allocation Strategy” describe strategies that each month hold offensive (defensive) assets when average return on iShares TIPS Bond ETF (TIP) over the past 1, 3, 6 and 12 months is positive (negative). Is past return of TIP, which impounds investor expectations for U.S. inflation, a reliable and useful indicator of future asset class returns? To investigate, we relate TIP returns to future returns for each of the following 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)

We consider both linear correlation and non-linear ranking tests. We look at TIP returns over the past 1, 3, 6 and 12 months separately, and as an average of these past returns (TIP 13612). We look at correlation variability and perform a simple test of economic value. Using monthly dividend-adjusted returns for TIP and the above asset class proxies as available during December 2003 (limited by TIP) through January 2026, we find that: Keep Reading

Can exploiting the relatively high betas of small and midsize stocks according to regimes defined by past iShares TIPS Bond ETF (TIP) returns beat the market? In his January 2026 paper entitled “A Regime-Aware Market Capitalization Rotation Strategy Using Hybrid Asset Allocation Momentum”, Peter Richman evaluates a momentum strategy inspired by the Hybrid Asset Allocation (HAA) that, at the end of each month (HAA 13612):

1. Takes an offensive (defensive) stance if the total return for TIP is positive (not positive).
2. If on offense, allocates to the one of SPDR S&P 500 ETF Trust (SPY), SPDR S&P MidCap 400 ETF Trust (MDY) or iShares Core S&P Small-Cap ETF (IJR) with the highest arithmetic mean of total returns over the past 1, 3, 6 and 12 months.
3. If on defense, allocates to iShares 1–3 Year Treasury Bond ETF (SHY).

His benchmark is buy-and-hold Vanguard Total Stock Market ETF (VTI). Using monthly total returns for the selected ETFs from the end of January 2005 through the end of December 2025, he finds that: Keep Reading

A subscriber suggested that the Simple Asset Class ETF Value Strategy (SACEVS) and the Simple Asset Class ETF Momentum Strategy (SACEMS) may each exhibit return momentum at the strategy level, such that an investor considering both as in Combined Value-Momentum Strategy may want to pick the one with a stronger recent return. To investigate, we test a SACEVS Best Value-SACEMS Equal-Weighted (EW) Top 2 combination strategy that each month picks the strategy with the higher return over a specified lookback interval (SACEVS-SACEMS Momentum). We consider lookback intervals of 1 to 12 months. We use monthly rebalanced 50% SACEVS Best Value-50% SACEMS EW Top 2 (SACEVS-SACEMS 50-50) as a benchmark. We focus on gross compound annual growth rate (CAGR) and maximum drawdown (MaxDD) as key performance metrics. Using SACEVS Best Value and SACEMS EW Top 2 gross monthly returns during July 2006 (limited by SACEMS) through January 2026, we find that:

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