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SACEVS with SMA Filter

Posted in Fundamental Valuation, Strategic Allocation, Technical Trading

"SACEMS with SMA Filter" examines whether applying a simple moving average (SMA) filter to "Simple Asset Class ETF Momentum Strategy" (SACEMS) winners improves strategy performance. Does such a filter improve performance of the "Simple Asset Class ETF Value Strategy" (SACEVS), which seeks diversification across the following three asset class exchange-traded funds (ETF) plus cash according to the relative valuations of term, credit and equity risk premiums?

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

Since many technical traders use a 10-month SMA (SMA10), we test effectiveness of requiring that each of the ETFs pass an SMA10 filter by comparing performances for three scenarios:

  1. Baseline - SACEVS as presented at "Value Strategy".
  2. With SMA10 Filter - Run Baseline SACEVS and then apply SMA10 filters to dividend-adjusted prices of ETF allocations. If an allocated ETF is above (below) its SMA10, hold the allocation as specified (Cash). This rule is inapplicable to any Cash allocation.
  3. With Half SMA10 Filter - Same as scenario 2, but, if an allocated ETF is above (below) its SMA10, hold the allocation as specified (half the specified allocation and half cash at the T-bill yield).

We focus on compound annual growth rates (CAGR) and maximum drawdowns (MaxDD) of SACEVS Best Value, SACEVS Weighted and the 60%-40% SPY-TLT benchmark (60-40) portfolios. Using required SACEVS monthly historical data and monthly dividend-adjusted closing prices for the above asset class proxies and the yield for Cash over the period July 2002 (the earliest all ETFs are available) through November 2018, we find that:

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