We developed the Simple Asset Class ETF Momentum Strategy (SACEMS) about six years ago and the Simple Asset Class ETF Value Strategy (SACEVS) about two years ago independently, focusing on the separate logic of asset choices for each. As tested in “SACEMS-SACEVS Mutual Diversification”, these two strategies are mutually diversifying, so combining them works better in some ways than using one or the other. Beginning May 2017, we are making four changes to these strategies for ease of implementation and combination, with modest compromises in logic. Specifically, we are:
First, we are substituting SPDR S&P 500 (SPY) for iShares Russell 1000 (IWB) as the large-capitalization U.S. equity option in SACEMS. Considerations are:
- SPY is the equity allocation option in SACEVS, allowing coordination of positions when both strategies specify it.
- SPY and IWB are close substitutes regarding return performance.
- SPY is more liquid (based on trading volume) than IWB and has a lower expense ratio.
Second, we are substituting Vanguard REIT ETF (VNQ) for SPDR Dow Jones REIT ETF (RWR) in SACEMS. Considerations are:
- VNQ has a shorter history than RWR, the history is long enough.
- VNQ and RWR are close substitutes regarding return performance.
- VNQ is far more liquid (based on trading volume) and has a lower annual expense ratio than RWR.
We have updated the description and backtest/tracking data on the SACEMS page to reflect these two changes, which result in slight performance changes.
Third, we are substituting iShares 20+ Year Treasury Bond (TLT) for iShares 7-10 Year Treasury Bond (IEF) as the term premium position in SACEVS. Considerations are:
- TLT is the long-term U.S. Treasuries allocation option in SACEMS, allowing coordination of positions when both strategies specify it.
- TLT and IEF are similar, but the longer duration of TLT makes it a more aggressive vehicle for exploiting the term premium.
- The duration of IEF is a closer match to the 10-year U.S Treasury note yield used in SACEVS to estimate the term, credit and equity premiums.
- Substituting IEF for TLT in SACEMS materially hurts SACEMS performance.
Fourth, we are adjusting the update cycle for SACEVS from the first day of the trading month to the last day of the trading month to match the update cycle for SACEMS. Considerations are:
- Synchronizing the SACEVS and SACEMS update cycles allows coordination of SPY and TLT positions when both strategies specify them.
- The old cycle waits one day for end-of-month Baa bond yield data so that all inputs are end-of-month. Inputs are therefore matched based on measurement point, but somewhat mismatched based on when they become available.
- The revised cycle uses end-of-month data for the U.S. Treasury bill yield, the 10-year U.S Treasury note yield and the S&P 500 Index level, but prior-day Baa bond yield. The Baa bond yield input is therefore slightly mismatched based on measurement point, but the set of inputs is approximately matched on when they become available.
- Maintaining SACEVS with dividend-adjusted returns is easier using end-of-month data.
We have updated the SACEVS page to reflect these changes. There are modest improvements to compound annual growth rates for SACEVS and its benchmark 60-40 SPY-TLT portfolio but also increases in volatilities, because TLT is more volatile than IEF.
Prior background research on SACEMS and SACEVS will incorporate these changes whenever updated.
Frequently Asked Questions
What are the Simple Asset Class ETF Momentum Strategy (SACEMS) and Simple Asset Class ETF Value Strategy (SACEVS)?
SACEMS (Simple Asset Class ETF Momentum Strategy) and SACEVS (Simple Asset Class ETF Value Strategy) are two exchange-traded fund allocation strategies developed independently, with SACEMS created about six years and SACEVS about two years before the May 2017 update. Each uses separate logic for choosing asset classes. They are mutually diversifying, so combining them works better in some ways than using either alone.
Does combining SACEMS and SACEVS improve results compared with using either strategy alone?
Combining SACEMS and SACEVS works better in some ways than using one or the other, because the two strategies are mutually diversifying, as tested in "SACEMS-SACEVS Mutual Diversification." The May 2017 changes made to ease combination also produced modest improvements in compound annual growth rates for SACEVS and its 60-40 SPY-TLT benchmark, though with higher volatilities.
How does synchronizing the SACEVS and SACEMS monthly update cycles work?
SACEVS was moved from updating on the first trading day of the month to the last trading day of the month, matching SACEMS, so SPY and TLT positions can be coordinated when both strategies specify them. The revised cycle uses end-of-month data for the Treasury bill yield, 10-year Treasury note yield and S&P 500 Index level, but the prior-day Baa bond yield. Inputs are thus approximately matched on when they become available, and maintaining dividend-adjusted returns is easier with end-of-month data.
Is TLT a good substitute for IEF as a term premium position, and how do the two Treasury ETFs differ?
TLT (iShares 20+ Year Treasury Bond) and IEF (iShares 7-10 Year Treasury Bond) are similar, but TLT's longer duration makes it a more aggressive vehicle for exploiting the term premium. IEF's duration more closely matches the 10-year Treasury note yield used in SACEVS to estimate term, credit and equity premiums. Substituting IEF for TLT in SACEMS materially hurts SACEMS performance, which supported using TLT in SACEVS.
What are the drawbacks of the ETF substitutions and timing changes made to SACEMS and SACEVS?
The SACEMS and SACEVS changes involve modest compromises in logic for ease of implementation and combination. Replacing IEF with TLT raises volatility in SACEVS and its 60-40 SPY-TLT benchmark because TLT is more volatile, and the SPY-for-IWB and VNQ-for-RWR swaps slightly change SACEMS performance. The new SACEVS cycle also leaves the Baa bond yield input slightly mismatched on measurement point, since it uses the prior-day value.