Objective research to aid investing decisions

Value Investing Strategy (Strategy Overview)

Allocations for December 2021 (Final)
Cash TLT LQD SPY

Momentum Investing Strategy (Strategy Overview)

Allocations for December 2021 (Final)
1st ETF 2nd ETF 3rd ETF

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.

How Are Robotics-AI ETFs Doing?

How do exchange-traded-funds (ETF) focused on development of robotics-artificial intelligence (AI), an arguably hot area of technology, perform? To investigate, we consider five of the largest such ETFs, all currently available, as follows:

We use Invesco QQQ Trust (QQQ) as a benchmark, assuming investors look at robotics-AI stocks as a way to beat other technology stocks. We focus on monthly return statistics, along with compound annual growth rates (CAGR) and maximum drawdowns (MaxDD). Using monthly returns for the five robotics-AI ETFs and QQQ as available through October 2021, we find that: Keep Reading

Federal Reserve Treasuries Holdings and Asset Returns

Is the level, or changes in the level, of Federal Reserve (Fed) holdings of U.S. Treasuries (bills, notes, bonds and TIPS, measured weekly as of Wednesday) an indicator of future stock market and/or Treasuries returns? To investigate, we take dividend-adjusted SPDR S&P 500 (SPY) and iShares Barclays 20+ Year Treasury Bond (TLT) as tradable proxies for the U.S. stock and Treasuries markets, respectively. Using weekly Fed holdings of Treasuries, and SPY and TLT total returns during mid-December 2002 through mid-November 2021, we find that: Keep Reading

Realistic Returns for Investing in the Stock Market

Is the conventional way of estimating the equity risk premium based on total shareholder return (TSR, assuming reinvestment of all dividends into stocks) reasonable? In their November 2021 paper entitled “Stock Investors’ Returns are Exaggerated”, Jesse Fried, Paul Ma and Charles Wang examine the realism of TSR as a measure of aggregate U.S. equity investor performance and therefore as the basis for U.S. equity premium estimation. They define an alternative all-shareholder return (ASR) that explicitly incorporates feasible reinvestment possibilities for cash distributions. Specifically, ASR:

  • Rejects the infeasible total dividend reinvestment assumption and alternatively assumes shareholders reallocate dividends into U.S. Treasuries of different maturities, corporate bonds or housing.
  • Takes into account all sources of cash flows from firms to investors, including repurchases and equity issuances (net distributions).

Using monthly estimated returns and cash distributions for the U.S. stock market and returns for the specified alternatives for cash distribution during January 1926 through December 2015, they find that: Keep Reading

Job Openings and Stock Market Returns

Do U.S. non-farm job openings, a measurement from the Job Openings and Labor Turnover Survey run monthly by the U.S. Bureau of Labor Statistics, have implications for future U.S. stock market return? High (low) job openings rate may indicate a strong (weak) economy and/or may signal high (low) wage inflation. To investigate, we relate job openings to performance of SPDR S&P 500 (SPY) as a proxy for the stock market. Using monthly job openings (which has a release delay of about six weeks) during December 2000 through September 2021 and monthly dividend-adjusted returns for SPY during December 2000 through October 2021, we find that: Keep Reading

SACEVS with Quarterly Allocation Updates

Do quarterly allocation updates for the Best Value and Weighted versions of the “Simple Asset Class ETF Value Strategy” (SACEVS) work as well as monthly updates? These strategies allocate funds to the following asset class exchange-traded funds (ETF) according to valuations of term, credit and equity risk premiums, or to cash if no premiums are undervalued:

3-month Treasury bills (Cash)
iShares 20+ Year Treasury Bond (TLT)
iShares iBoxx $ Investment Grade Corporate Bond (LQD)
SPDR S&P 500 (SPY)

Changing from monthly to quarterly allocation updates does not sacrifice information about lagged quarterly S&P 500 Index earnings, but it does sacrifice currency of term and credit premiums. To assess alternatives, we compare cumulative performances and the following key metrics for quarterly and monthly allocation updates: gross compound annual growth rate (CAGR), gross maximum drawdown (MaxDD), annual gross returns and volatilities and annual gross Sharpe ratios. Using monthly dividend-adjusted closes for the above ETFs during September 2002 (earliest alignment of months and quarters) through September 2021, we find that:

Keep Reading

Quit Rate and Future Asset Returns

Does the U.S. employment quit rate, a measurement from the Job Openings and Labor Turnover Survey run monthly by the U.S. Bureau of Labor Statistics, have implications for future U.S. stock market or U.S. Treasury bond return? A high (low) quit rate may indicate a strong (weak) economy and/or may signal high (low) wage inflation. To investigate, we relate quit rate to future performance of SPDR S&P 500 (SPY) as a proxy for the stock market and of iShares 20+ Year Treasury Bond (TLT) as a proxy for government bonds. Using monthly quit rate (which has a release delay of about six weeks) during December 2000 through August 2021 and monthly dividend-adjusted returns for SPY and TLT as available during December 2000 through September 2021, we find that: Keep Reading

How Are Renewable Energy ETFs Doing?

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 2021, we find that: Keep Reading

SACEVS-SACEMS for Value-Momentum Diversification

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:

  1. 50-50 Best Value – EW Top 2: SACEVS Best Value paired with SACEMS Equally Weighted (EW) Top 2 (aggressive value and somewhat aggressive momentum).
  2. 50-50 Best Value – EW Top 3: SACEVS Best Value paired with SACEMS EW Top 3 (aggressive value and diversified momentum).
  3. 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 September 2021, we find that: Keep Reading

Testing a Countercyclical Asset Allocation Strategy

“Countercyclical Asset Allocation Strategy” summarizes research on a simple countercyclical asset allocation strategy that systematically raises (lowers) the allocation to an asset class when its current aggregate allocation is relatively low (high). The underlying research is not specific on calculating portfolio allocations and returns. To corroborate findings, we use annual mutual fund and exchange-traded fund (ETF) allocations to stocks and bonds worldwide from the 2021 Investment Company Fact Book, Data Tables 3 and 11 to determine annual countercyclical allocations for stocks and bonds (ignoring allocations to money market funds). Specifically:

  • If actual aggregate mutual fund/ETF allocation to stocks in a given year is above (below) 60%, we set next-year portfolio allocation below (above) 60% by the same percentage.
  • If actual aggregate mutual fund/ETF allocation to bonds in a given year is above (below) 40%, we set next-year portfolio allocation below (above) 40% by the same percentage.

We then apply next-year allocations to stock (Fidelity Fund, FFIDX) and bond (Fidelity Investment Grade Bond Fund, FBNDX) mutual funds that have long histories. Based on Fact Book annual publication dates, we rebalance at the end of April each year. Using the specified actual fund allocations for 1984 through 2020 and FFIDX and FBNDX May through April total returns and end-of-April 1-year U.S. Treasury note (T-note) yields for 1985 through 2021, we find that: Keep Reading

Stock Market Performance Perspectives

How different are stock market performance metrics for:

  • Capital gains only, capital gains plus dividends accrued as cash (spent or saved), and capital gains plus dividends reinvested in the stock market?
  • Nominal versus real returns?
  • Simple return-to-risk calculations versus Sharpe ratio?

Using quarterly S&P 500 Index levels and dividends, quarterly U.S. Consumer Price Index (CPI) data (all items) and monthly 3-month U.S. Treasury bill (T-bill) yield as the risk-free rate/return on cash during the first quarter of 1988 through the second quarter of 2021, we find that: Keep Reading

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