Objective research to aid investing decisions

Value Investing Strategy (Strategy Overview)

Allocations for February 2020 (Final)
Cash TLT LQD SPY

Momentum Investing Strategy (Strategy Overview)

Allocations for February 2020 (Final)
1st ETF 2nd ETF 3rd ETF

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?

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 December 2019, we 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 test 14 ETFs as potential safe havens:

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

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 being -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 14 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 December 2019, 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, one live (with low trading volume) and one essentially dead:

  • 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. This fund stopped trading about July 2018, but an indicative value is still available.

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 2019, we 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) – seeks positive total returns in rising or falling markets that are uncorrelated with broad market equity and fixed income returns via diversified combination of commodities, currencies and interest rates futures.
  2. First Trust Morningstar Managed Futures Strategy (FMF) – seeks positive returns that are uncorrelated to broad market equity and fixed income returns via a portfolio of exchange-listed futures.
  3. ProShares Managed Futures Strategy (FUT) – seeks to profit in rising and falling markets by long and short positions in futures across asset classes such as commodities, currencies and fixed income such that each contributes equally to portfolio risk.

We focus on compound annual growth rate (CAGR), maximum drawdown (MaxDD) and correlations of returns with those of SPDR S&P 500 (SPY) and iShares Barclays 20+ Year Treasury Bond (TLT) 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 2019, and contemporaneous monthly returns for the benchmark index, SPY and TLT, 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 exchange-traded fund (ETF) asset class proxies used in “Simple Asset Class ETF Momentum Strategy” (SACEMS) at a monthly measurement frequency. Using monthly dividend-adjusted closing prices for FXY and the asset class proxies since March 2007 as available through July 2019, 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 exchange-traded fund (ETF) asset class proxies used in “Simple Asset Class ETF Momentum Strategy” (SACEMS) at a monthly measurement frequency. Using monthly dividend-adjusted closing prices for FXE and the asset class proxies since March 2007 as available through July 2019, 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 exchange-traded fund (ETF) asset class proxies used in “Simple Asset Class ETF Momentum Strategy” (SACEMS) at a monthly measurement frequency. Using monthly dividend-adjusted closing prices for CYB and the asset class proxies during May 2008 (when CYB is first available) through July 2019 (135 months), we find that: Keep Reading

Asset Class ETF Interactions with the U.S. Dollar

How do different asset classes interact with U.S. dollar valuation? To investigate, we consider relationships between Powershares DB US Dollar Index Bullish Fund (UUP) and the exchange-traded fund (ETF) asset class proxies used in “Simple Asset Class ETF Momentum Strategy” (SACEMS) at a monthly measurement frequency. Using monthly dividend-adjusted closing prices for UUP and the asset class proxies since March 2007 as available through July 2019, we find that: Keep Reading

The BGSV Portfolio

How might an investor construct a portfolio of very risky assets? To investigate, we consider:

  • First, diversifying with monthly rebalancing of:
    1. Bitcoin Investment Trust (GBTC), representing a very long-term option on Bitcoins.
    2. VanEck Vectors Junior Gold Miners ETF (GDXJ), representing a very long-term option on gold.
    3. ProShares Short VIX Short-Term Futures (SVXY), to capture part of the U.S. stock market volatility risk premium by shorting short-term S&P 500 Index implied volatility (VIX) futures. SVXY has a change in investment objective at the end of February 2018 (see “Using SVXY to Capture the Volatility Risk Premium”).
  • Second, capturing upside volatility and managing drawdown of this portfolio via gain-skimming to a cash position.

We assume equal initial allocations of $10,000 to each of the three risky assets. We execute a monthly skim as follows: (1) if the risky assets have month-end combined value less than combined initial allocations, we rebalance to equal weights for next month; or, (2) if the risky assets have combined month-end value greater than combined initial allocations, we rebalance to initial allocations and move the excess permanently (skim) to cash. We conservatively assume monthly portfolio reformation frictions of 1% of month-end combined value of risky assets. We assume accrued skimmed cash earns the 3-month U.S. Treasury bill (T-bill) yield. Using monthly prices of GBTC, GDXJ and SVXY adjusted for splits and dividends and contemporaneous T-bill yield during May 2015 (limited by GBTC) through June 2019, we find that:

Keep Reading

What Kind of Asset Is Bitcoin?

Does Bitcoin behave like some other asset class? To investigate, we use the easily held, liquid and matched-close Grayscale Bitcoin Trust (GBTC) as a proxy for Bitcoin holdings and calculate daily and monthly return correlations between GBTC and each of 33 exchange-traded products encompassing eight used in “Simple Asset Class ETF Momentum Strategy ” (SACEMS), 22 considered in “SACEMS Portfolio-Asset Addition Testing” plus SPDR Bloomberg Barclays 1-3 Month T-Bill (BIL), iShares 1-3 Year Treasury Bond (SHY) and Powershares DB US Dollar Index Bullish Fund (UUP). These selections represent a broad set of asset classes. We start calculations with inception of GBTC on May 11, 2015. All other assets are available as of that date. Using daily and monthly adjusted (for dividends and splits) prices for GBTC and the 33 exchange-traded products during May 11, 2015 through June 21, 2019, we find that: Keep Reading

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