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Currency Trading

Currency trading (forex or FX) offers investors a way to trade on country or regional fiscal/monetary situations and tendencies. Are there reliable ways to exploit this market? Does it represent a distinct asset class?

Net Speculators Position as Futures Return Predictor

Should investors rely on aggregate positions of speculators (large non-commercial traders) as indicators of expected futures market returns? In their November 2018 paper entitled “Speculative Pressure”, John Hua Fan, Adrian Fernandez-Perez, Ana-Maria Fuertes and Joëlle Miffre investigate speculative pressure (net positions of speculators) as a predictor of futures contract prices across four asset classes (commodity, currency, equity index and interest rates/fixed income) both separately and for a multi-class portfolio. They measure speculative pressure as end-of-month net positions of speculators relative to their average weekly net positions over the past year. Positive (negative) speculative pressure indicates backwardation (contango), with speculators net long (short) and futures prices expected to rise (fall) as maturity approaches. They measure expected returns via portfolios that systematically buy (sell) futures with net positive (negative) speculative pressure. They compare speculative pressure strategy performance to those for momentum (average daily futures return over the past year), value (futures price relative to its price 4.5 to 5.5 years ago) and carry (roll yield, difference in log prices of  nearest and second nearest contracts). Using open interests of large non-commercial traders from CFTC weekly legacy Commitments of Traders (COT) reports for 84 futures contracts series (43 commodities, 11 currencies, 19 equity indexes and 11 interest rates/fixed income) from the end of September 1992 through most of May 2018, along with contemporaneous Friday futures settlement prices, they find that: Keep Reading

Best Safe Haven ETF?

A subscriber asked which exchange-traded fund (ETF) asset class proxies make the best safe havens for the U.S. stock market as proxied by the S&P 500 Index. To investigate, we consider the following 12 ETFs as potential safe havens:

Utilities Select Sector SPDR ETF (XLU)
iShares 20+ Year Treasury Bond (TLT)
iShares 7-10 Year Treasury Bond (IEF)
iShares 1-3 Year Treasury Bond (SHY)
iShares Core US Aggregate Bond (AGG)
iShares TIPS Bond (TIP)
Vanguard REIT ETF (VNQ)
SPDR Gold Shares (GLD)
PowerShares DB Commodity Tracking ETF (DBC)
United States Oil (USO)
iShares Silver Trust (SLV)
PowerShares DB G10 Currency Harvest ETF (DBV)

We consider three ways of testing these ETFs as safe havens for the U.S. stock market based on daily or monthly returns:

  1. Contemporaneous return correlation with the S&P 500 Index during all market conditions at daily and monthly frequencies.
  2. Performance during S&P 500 Index bear markets as defined by the index being below its 10-month simple moving average (SMA10) at the end of the prior month.
  3. Performance during S&P 500 Index bear markets as defined by the index falling -20%, -15% or -10% below its most recent peak at the end of the prior month.

Using daily and monthly dividend-adjusted closing prices for the 12 ETFs since respective inceptions, and contemporaneous daily and monthly levels of the S&P 500 Index since 10 months before the earliest ETF inception, all through November 2018, we find that: Keep Reading

Are Currency Carry Trade ETFs Working?

Is the currency carry trade, as implemented by exchange-traded funds/notes (ETF/ETN), attractive? To investigate, we consider two currency carry trade ETF/ETNs, neither of which has appreciable trading volume:

  • PowerShares DB G10 Currency Harvest Fund (DBV) – tracks changes in the Deutsche Bank G10 Currency Future Harvest Index. This index consists of futures contracts on certain G10 currencies with up to 2:1 leverage to exploit the tendency that currencies with relatively high interest rates tend to appreciate relative to currencies with relatively low interest rates, reconstituted annually in November.
  • iPath Optimized Currency Carry (ICITF) – provides exposure to the Barclays Optimized Currency Carry Index, which reflects the total return of a strategy that holds high-yielding G10 currencies financed by borrowing low-yielding G10 currencies. These ETNs are unsecured debt obligations of the issuer and have no principal protection.

Because trading in these products is thin, we focus on monthly return statistics, plus compound annual growth rates (CAGR) and maximum drawdowns (MaxDD). For reference (not benchmarking), we compare results to those for SPDR S&P 500 (SPY) and iShares Barclays 20+ Year Treasury Bond (TLT). Using monthly total returns for the two currency carry trade products, SPY and TLT as available through September 2018, we find that: Keep Reading

Predicting Crypto-asset Returns with Past Returns-Volume

Do crypto-asset trading volumes usefully predict returns? In the August 2018 draft of their paper entitled “Trading Volume in Cryptocurrency Markets”, Daniele Bianchi and Alexander Dickerson investigate the power of crypto-asset trading volumes to predict future returns. They calculate volumes and returns based on either 12-hour or 24-hour intervals. They process these inputs as follows:

  • To detect volume abnormalities, they estimate its log deviation from trend over a rolling 21-interval window. To put different crypto-assets on an equal footing, they then standardized by dividing by its log standard deviation over the same window.
  • They measure past returns over the same interval, denominated in bitcoins, (thereby including Bitcoin only indirectly). To emphasize the most liquid exchanges, they weight returns by volume when aggregating.

To assess economic significance of findings, they double-sort crypto-assets first into two to four groups ranked by the return metric and then within each group into three or four subgroups ranked by the volume metric. Using intraday (10-minute) price and volume data for 26 crypto-assets from over 150 exchanges (90% of total crypto-asset market capitalization), each denominated in bitcoins, during January 1, 2017 through May 10, 2018, they find that:

Keep Reading

Are Managed Futures ETFs Working?

Are managed futures, as implemented by exchange-traded funds (ETF), attractive? To investigate, we consider three managed futures ETFs, all currently available:

  1. WisdomTree Managed Futures Strategy (WTMF).
  2. First Trust Morningstar Managed Futures Strategy (FMF).
  3. ProShares Managed Futures Strategy (FUT).

We focus on compound annual growth rate (CAGR), maximum drawdown (MaxDD) and correlation of returns with those of SPDR S&P 500 (SPY) as key performance statistics. We use Eurekahedge CTA/Managed Futures Hedge Fund Index (the index) as a benchmark. Using monthly returns for the three funds as available through August 2018, and contemporaneous monthly returns for the benchmark index and SPY, we find that: Keep Reading

Simple Currency ETF Momentum Strategy

Do exchange-traded funds (ETF) that track major currencies support a relative momentum strategy? To investigate, we consider the following four ETFs:

Invesco DB US Dollar Bullish (UUP)
Invesco CurrencyShares Euro Currency (FXE)
Invesco CurrencyShares Japanese Yen (FXY)
WisdomTree Chinese Yuan Strategy (CYB)

We each month rank these ETFs based on past return over lookback intervals ranging from one to 12 months. We consider portfolios of past winners reformed monthly based on Top 1 and on equally weighted (EW) Top 2 and Top 3 ETFs. The benchmark portfolio is the equally weighted combination of all four ETFs. We present findings in formats similar to those used for the Simple Asset Class ETF Momentum Strategy and the Simple Asset Class ETF Value Strategy. Using monthly adjusted closing prices for the currency ETFs during March 2007 (when three become available) through August 2018, we find that: Keep Reading

Asset Class ETF Interactions with the Yuan

How do different asset classes interact with the Chinese yuan-U.S. dollar exchange rate? To investigate, we consider relationships between WisdomTree Chinese Yuan Strategy (CYB) and the following exchange-traded fund (ETF) asset class proxies used in “Simple Asset Class ETF Momentum Strategy” (SACEMS) at a monthly measurement frequency:

PowerShares DB Commodity Index Tracking (DBC)
iShares MSCI Emerging Markets Index (EEM)
iShares MSCI EAFE Index (EFA)
SPDR Gold Shares (GLD)
iShares Russell 2000 Index (IWM)
SPDR S&P 500 (SPY)
iShares Barclays 20+ Year Treasury Bond (TLT)
Vanguard REIT ETF (VNQ)

Using monthly dividend-adjusted closing prices for CYB and the asset class proxies during May 2008 (when all ETFs are first available, limited by CYB) through July 2018 (123 months), we find that: Keep Reading

Asset Class ETF Interactions with the Yen

How do different asset classes interact with the Japanese yen-U.S. dollar exchange rate? To investigate, we consider relationships between Invesco CurrencyShares Japanese Yen (FXY) and the following exchange-traded fund (ETF) asset class proxies used in “Simple Asset Class ETF Momentum Strategy” (SACEMS) at a monthly measurement frequency:

PowerShares DB Commodity Index Tracking (DBC)
iShares MSCI Emerging Markets Index (EEM)
iShares MSCI EAFE Index (EFA)
SPDR Gold Shares (GLD)
iShares Russell 2000 Index (IWM)
SPDR S&P 500 (SPY)
iShares Barclays 20+ Year Treasury Bond (TLT)
Vanguard REIT ETF (VNQ)

Using monthly dividend-adjusted closing prices for FXY and the asset class proxies during February 2007 (when all ETFs are first available, limited by FXY) through July 2018 (123 months), we find that: Keep Reading

Asset Class ETF Interactions with the Euro

How do different asset classes interact with euro-U.S. dollar exchange rate ? To investigate, we consider relationships between Invesco CurrencyShares Euro Currency (FXE) and the following exchange-traded fund (ETF) asset class proxies used in “Simple Asset Class ETF Momentum Strategy” (SACEMS) at a monthly measurement frequency:

PowerShares DB Commodity Index Tracking (DBC)
iShares MSCI Emerging Markets Index (EEM)
iShares MSCI EAFE Index (EFA)
SPDR Gold Shares (GLD)
iShares Russell 2000 Index (IWM)
SPDR S&P 500 (SPY)
iShares Barclays 20+ Year Treasury Bond (TLT)
Vanguard REIT ETF (VNQ)

Using monthly dividend-adjusted closing prices for FXE and the asset class proxies during February 2006 (when all ETFs are first available, limited by DBC) through July 2018 (150 months), we find that: Keep Reading

Asset Class ETF Interactions with the U.S. Dollar

How do different asset classes interact with aggregate U.S. dollar valuation? To investigate, we consider relationships between Powershares DB US Dollar Index Bullish Fund (UUP) and the following exchange-traded fund (ETF) asset class proxies used in “Simple Asset Class ETF Momentum Strategy” (SACEMS) at a monthly measurement frequency:

PowerShares DB Commodity Index Tracking (DBC)
iShares MSCI Emerging Markets Index (EEM)
iShares MSCI EAFE Index (EFA)
SPDR Gold Shares (GLD)
iShares Russell 2000 Index (IWM)
SPDR S&P 500 (SPY)
iShares Barclays 20+ Year Treasury Bond (TLT)
Vanguard REIT ETF (VNQ)

Using monthly dividend-adjusted closing prices for UUP and the asset class proxies during March 2007 (when all ETFs are first available, limited by UUP) through July 2018 (137 months), we find that: Keep Reading

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