Equity Premium
Governments are largely insulated from market forces. Companies are not. Investments in stocks therefore carry substantial risk in comparison with holdings of government bonds, notes or bills. The marketplace presumably rewards risk with extra return. How much of a return premium should investors in equities expect? These blog entries examine the equity risk premium as a return benchmark for equity investors.
November 28, 2025 - Equity Premium
“Nixed: The Upside of Getting Dumped”, flagged by a subscriber, finds that “index deletions…could add an abnormal upside to a portfolio when the current growth-dominated bubble starts to deflate.” The authors have quantified findings as the Research Affiliates Deletions Index (NIXT), constructed by:
- Starting with deletions due to market capitalization changes from the 500 and 1,000 largest U.S. stocks by market capitalization.
- Removing the bottom 20% of deletions based on firm quality assessments.
- Holding the equal-weighted remaining deletions up to five years (or until they rejoin a top market capitalization index), rebalancing annually at the end of May.
Do index deletions inherently underperform? To investigate we look at stocks deleted from the S&P 500 Index due to market capitalization changes over the past few years and compare their average performance during the 5, 10, 21, 63, 126 and 252 trading days after deletion to the average performance of date-matched positions in SPDR S&P 500 ETF Trust (SPY). Using dividend-adjusted prices for 61 S&P 500 deletions at closes on deletion dates and corresponding dividend-adjusted prices for SPY during April 2020 through early November 2025, we find that: Keep Reading
November 20, 2025 - Equity Premium, Investing Expertise
How do exchange-traded-funds (ETF) that employ artificial intelligence (AI) to pick assets perform? To investigate, we consider ten such ETFs, eight of which are currently available:
We use SPDR S&P 500 ETF Trust (SPY) for comparison, though it is not conceptually matched to some of the ETFs. We focus on monthly return statistics, along with compound annual growth rates (CAGR) and maximum drawdowns (MaxDD). Using monthly total returns for the ten AI-powered ETFs and SPY as available through October 2025, we find that: Keep Reading
November 12, 2025 - Equity Premium, Momentum Investing
Are stock and sector momentum strategies, as implemented by exchange-traded funds (ETF), attractive? To investigate, we consider nine momentum-oriented equity ETFs, all currently available, in order of longest to shortest available histories:
We focus on monthly return statistics, along with compound annual growth rates (CAGR) and maximum drawdowns (MaxDD). We assign broad market benchmark ETFs according to momentum fund descriptions. Using monthly dividend-adjusted returns for the nine momentum funds and respective benchmarks as available through October 2025, we find that: Keep Reading
November 7, 2025 - Equity Premium, Gold, Technical Trading
A reader requested a test of the following hypothesis from the article “Gold’s Bluff – Is a 30 Percent Drop Next?” [no longer available]: “Ironically, gold is more than just a hedge against market turmoil. Gold is actually one of the most accurate indicators of the stock market’s long-term direction. The Dow Jones measured in gold is a forward looking indicator.” To test this assertion, we examine relationships between the spot price of gold and the level of the Dow Jones Industrial Average (DJIA). Using monthly data for the spot price of gold in dollars per ounce and DJIA over the period January 1971 through September 2025, we find that: Keep Reading
October 21, 2025 - Animal Spirits, Equity Premium
How do exchange-traded-funds (ETF) focused on supplying renewable energy perform? To investigate, we consider nine of the largest renewable energy ETFs, all currently available, as follows:
We use SPDR S&P 500 (SPY) as a benchmark, assuming investors look at renewable energy stocks to beat the market and not to beat the energy sector. We focus on monthly return statistics, along with compound annual growth rates (CAGR) and maximum drawdowns (MaxDD). Using monthly returns for the nine renewable energy ETFs and SPY as available through September 2025, we find that: Keep Reading
October 15, 2025 - Bonds, Equity Premium, Strategic Allocation
Do target retirement date funds, offering glidepaths that shift asset allocations away from equities and toward bonds as target dates approach, safely generate attractive returns? To investigate, we consider seven such mutual funds offered by Vanguard, as follows:
We consider as benchmarks SPDR S&P 500 ETF Trust (SPY), iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) and both 80-20 and 60-40 monthly rebalanced SPY-LQD combinations. We look at monthly and annual return statistics, including compound annual growth rate (CAGR) and maximum drawdown (MaxDD). Using monthly total returns for SPY, LQD, three target retirement date funds since October 2003 and four target retirement date funds since June 2006 (limited by Vanguard inception dates), all through September 2025, we find that:
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October 9, 2025 - Animal Spirits, Equity Premium
Is it reasonable to assume that strong earnings growth and price-to-earnings ratio (P/E) expansion will sustain the unusually strong U.S. stock market returns of the past decade? In his brief September 2025 paper entitled “Expected Stock Returns in Bullish Times”, Javier Estrada decomposes stock returns into: (1) dividend yield, (2) change in earnings and (3) change in P/E. He then employs this decomposition to compare the bullish environments at the end of the 1990s with that of the summer of 2025, including an outlook for the next decade. Using Robert Shiller’s prices, earnings and dividends for the S&P Composite Index during 1872 through June 2025, he finds that: Keep Reading
October 7, 2025 - Equity Premium, Momentum Investing, Strategic Allocation, Value Premium, Volatility Effects
How can investors and fund managers best exploit premiums associated with value, momentum, profitability, investment and low volatility factors, either to generate absolute return or to beat a market benchmark? In his September 2025 paper entitled “Strategic Style Allocation: Absolute or Relative?”, Pim van Vliet examines strategic allocation across long-only, value-weighted versions of these equity factors, depending on objective: absolute return or benchmark outperformance. To assess absolute return, he evaluates Sharpe ratios of factor allocations. To assess benchmark outperformance, he evaluates information ratios of factor allocations. He also investigates dynamic allocation between low volatility and the other factors, with portfolio adjustment frictions. Using long-only U.S. value-weighted factor returns during July 1963 through May 2025 and global factor index returns during January 1999 through March 2025, he finds that: Keep Reading
September 30, 2025 - Bonds, Equity Premium, Momentum Investing, Strategic Allocation
Are the “Simple Asset Class ETF Value Strategy” (SACEVS) and the “Simple Asset Class ETF Momentum Strategy” (SACEMS) mutually diversifying. To check, based on feedback from subscribers about combinations of interest, we look at three equal-weighted (50-50) combinations of the two strategies, rebalanced monthly:
- 50-50 Best Value – EW Top 2: SACEVS Best Value paired with SACEMS Equally Weighted (EW) Top 2 (aggressive value and somewhat aggressive momentum).
- 50-50 Best Value – EW Top 3: SACEVS Best Value paired with SACEMS EW Top 3 (aggressive value and diversified momentum).
- 50-50 Weighted – EW Top 3: SACEVS Weighted paired with SACEMS EW Top 3 (diversified value and diversified momentum).
We consider as a benchmark a simple technical strategy (SPY:SMA10) that holds SPDR S&P 500 ETF Trust (SPY) when the S&P 500 Index is above its 10-month simple moving average and 3-month U.S. Treasury bills (Cash, or T-bills) when below. We also test sensitivity of results to deviating from equal SACEVS-SACEMS weights. Using monthly gross returns for SACEVS, SACEMS, SPY and T-bills during July 2006 through August 2025, we find that: Keep Reading
September 29, 2025 - Equity Premium, Technical Trading
“Compendium of Live ETF Factor/Niche Premium Capture Tests” summarizes results for its eponymous title. Here we add a live test of the short-term reversal effect among U.S. stocks. Specifically, we examine the performance of the now dead Vesper U.S. Large Cap Short-Term Reversal Strategy ETF (UTRN), designed to track the performance of a portfolio of 25 of the 500 largest U.S.-listed stocks most likely benefit from the short-term reversal effect. We use SPDR S&P 500 ETF Trust (SPY) as the benchmark. We focus on monthly return statistics, along with compound annual growth rates (CAGR) and maximum drawdowns (MaxDD). Using monthly total returns for UTRN and SPY during September 2018 (UTRN inception) through March 2025 (UTRN death), we find that:
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