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Value Investing Strategy (Strategy Overview)

Allocations for August 2022 (Final)
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Momentum Investing Strategy (Strategy Overview)

Allocations for August 2022 (Final)
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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.

Do Convertible Bond ETFs Attractively Meld Stocks and Bonds?

Do exchange-traded funds (ETF) that hold convertible corporate bonds offer attractive performance? To investigate, we compare performance statistics for the following four convertible bond ETFs, all currently available, to those for a monthly rebalanced 60%-40% combination of SPDR S&P 500 ETF Trust (SPY) and iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD):

  1. SPDR Bloomberg Convertible Securities ETF (CWB)
  2. iShares Convertible Bond ETF (ICVT)
  3. First Trust SSI Strategic Convertible Securities ETF (FCVT)
  4. American Century Quality Convertible Securities ETF (QCON)

We focus on average return, standard deviation of returns, reward/risk (average return divided by standard deviation of returns), compound annual growth rate (CAGR) and maximum drawdown (MaxDD), all based on monthly data. Using monthly dividend-adjusted returns for all specified ETFs since inceptions and for SPY and LQD over matched sample periods, all through June 2022, we find that: Keep Reading

Evaluating Country Investment Risk

How should global investors assess country sovereign bond and equity risks? In his July 2022 paper entitled “Country Risk: Determinants, Measures and Implications – The 2022 Edition”, Aswath Damodaran examines country risk from multiple perspectives. To estimate a country risk premium, he considers measurements of both country government bond risk and country equity risk. Based on a variety of sources and methods, he concludes that: Keep Reading

Are ESG ETFs Attractive?

Do exchange-traded funds selecting stocks based on environmental, social, and governance characteristics (ESG ETF) typically offer attractive performance? To investigate, we compare performance statistics of eight ESG ETFs, all currently available, to those of simple and liquid benchmark ETFs, as follows:

  1. iShares MSCI USA ESG Select ETF (SUSA), with SPDR S&P 500 ETF Trust (SPY) as a benchmark.
  2. iShares MSCI KLD 400 Social ETF (DSI), with SPY as a benchmark.
  3. iShares ESG MSCI EM ETF (ESGE), with iShares MSCI Emerging Markets ETF (EEM) as a benchmark.
  4. iShares ESG Aware MSCI EAFE ETF (ESGD), with iShares MSCI EAFE ETF (EFA) as a benchmark
  5. iShares ESG MSCI USA ETF (ESGU), with SPY as a benchmark.
  6. Nuveen ESG Small-Cap ETF (NUSC), with iShares Russell 2000 ETF (IWM) as a benchmark.
  7. Vanguard ESG U.S. Stock ETF (ESGV), with SPY as a benchmark.
  8. Vanguard ESG International Stock ETF (VSGX), with Vanguard FTSE All-World ex-US Index Fund ETF (VEU) as a benchmark.

We focus on average return, standard deviation of returns, reward/risk (average return divided by standard deviation of returns), compound annual growth rate (CAGR) and maximum drawdown (MaxDD), all based on monthly data. Using monthly dividend-adjusted returns for all specified ETFs since inceptions and for all benchmarks over matched sample periods through June 2022, we find that: Keep Reading

Failure of Equity Multifactor Funds?

Multifactor funds offer rules-based, diversified exposures to firm/stock factors found to beat the market in academic studies. Do the funds beat the market in real life? In his June 2022 paper entitled “Multifactor Funds: An Early (Bearish) Assessment”, Javier Estrada assesses performance of such funds across U.S., global and emerging markets relative to that of corresponding broad capitalization-weighted indexes and associated exchange-traded funds (ETF). He focuses on multifactor funds with exposure to at least three factors that are explicitly marketed as multifactor funds. Using monthly total returns for 56 U.S.-based equity multifactor funds with at least three years of data and $10 million in assets from respective inceptions (earliest June 2014) through March 2022, and total returns for matched broad market indexes and ETFs, he finds that:

Keep Reading

High-yield Bond Spread and Stock Market Returns

A subscriber asked about the relationship between the high-yield bond spread and stock market return, with focus on when the latter is entering a bear market. To investigate, we use the ICE BofA US High Yield Index Option-Adjusted Spread (HY Spread) as a proxy for the high-yield bond spread and SPDR S&P 500 ETF Trust (SPY) as a proxy for the U.S. stock market. We look at the following interactions between HY Spread and SPY:

  • Daily lead-lag correlations between HY Spread/change in HY Spread and SPY return.
  • Monthly lead-lag correlations between HY Spread/change in HY Spread and SPY return.
  • Average next-month SPY return by range of monthly changes in HY Spread.
  • Monthly changes in HY Spread before the worst next-month SPY returns.
  • Next-month SPY returns after the biggest monthly jumps in HY Spread.

Using daily values of HY Spread and daily dividend-adjust SPY prices from the end of December 1996 (limited by HY Spread) through mid-June 2022, we find that: Keep Reading

Are Preferred Stock ETFs Working?

Are preferred stock strategies, as implemented by exchange-traded funds (ETF), attractive? To investigate, we consider seven of the largest preferred stock ETFs, all currently available, in order of longest to shortest available histories:

We use a monthly rebalanced portfolio of 60% SPDR S&P 500 (SPY) and 40% iShares iBoxx $ Investment Grade Corporate Bond (LQD) (60-40) as a simple hybrid benchmark for all these funds except PGF, for which we use Financial Select Sector SPDR (XLF). We focus on monthly return statistics, along with compound annual growth rates (CAGR) and maximum drawdowns (MaxDD). Using monthly returns for the preferred stock ETFs and benchmarks as available through May 2022, we find that: Keep Reading

Expert Estimates of 2022 Country Equity Risk Premiums and Risk-free Rates

What are current estimates of equity risk premiums (ERP) and risk-free rates around the world? In their May 2022 paper entitled “Survey: Market Risk Premium and Risk-Free Rate Used for 95 Countries in 2022”, Pablo Fernandez, Teresa García de Santos and Javier Acin summarize results of a May 2022 email survey of international economic professors, analysts and company managers “about the Risk-Free Rate and the Market Risk Premium (MRP) used ‘to calculate the required return to equity in different countries.'” Results are in local currencies. Based on 4,337 specific and credible premium estimates spanning 95 countries for which there are at least six estimates, they find that: Keep Reading

Are Low Volatility Stock ETFs Working?

Are low volatility stock strategies, as implemented by exchange-traded funds (ETF), attractive? To investigate, we consider eight of the largest low volatility 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). Using monthly returns for the low volatility stock ETFs and their benchmark ETFs as available through May 2022, we find that: Keep Reading

Exploiting S&P 500 Index Additions and Deletions

Can investors beat the market by exploiting preannounced (anti-value) changes to traditional capitalization-weighted indexes, generally comprised of additions with recent strong performance and deletions with recent weak performance? In their May 2022 paper entitled “The Avoidable Costs of Index Rebalancing”, Robert Arnott, Chris Brightman, Vitali Kalesnik and Lillian Wu examine ways to exploit any momentum and/or reversion in these potentially overvalued additions and undervalued deletions. They focus on the period since October 1989, when S&P began preannouncing (announcement date) changes to the index days or weeks before the effective date of the changes (trade date). They further focus on discretionary changes, distinct from those driven by spinoffs and divestitures (nondiscretionary additions) or bankruptcies and mergers (nondiscretionary deletions). They note that changes in index holdings were made at the market close on the effective date until February 2017, and the prior close thereafter. Using data for 663 S&P 500 Index additions and 299 discretionary deletions during October 1989 through June 2021, they find that:

Keep Reading

Are Equity Momentum ETFs Working?

Are stock and sector momentum strategies, as implemented by exchange-traded funds (ETF), attractive? To investigate, we consider eight 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 benchmark ETFs according to momentum fund descriptions. Using monthly returns for the eight momentum funds and respective benchmarks as available through April 2022, we find that: Keep Reading

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