Objective research to aid investing decisions

Value Investing Strategy (Strategy Overview)

Allocations for December 2022 (Final)
Cash TLT LQD SPY

Momentum Investing Strategy (Strategy Overview)

Allocations for December 2022 (Final)
1st ETF 2nd ETF 3rd ETF

Real Estate

Most investors hold real estate as a home. Some invest separate in this asset class directly or indirectly via real estate investment trusts (REIT). Are these investments effective diversifiers?

Best Safe Haven ETF?

A subscriber asked which exchange-traded fund (ETF) asset class proxies make the best safe havens for the U.S. stock market as proxied by the S&P 500 Index. To investigate, we test 15 ETFs/funds as potential safe havens:

Utilities Select Sector SPDR Fund (XLU)
iShares 20+ Year Treasury Bond (TLT)
iShares 7-10 Year Treasury Bond (IEF)
iShares 1-3 Year Treasury Bond (SHY)
iShares iBoxx $ Investment Grade Corporate Bond (LQD)
iShares Core US Aggregate Bond (AGG)
iShares TIPS Bond (TIP)
Vanguard Real Estate Index Fund (VNQ)
SPDR Gold Shares (GLD)
Invesco DB Commodity Index Tracking Fund (DBC)
United States Oil Fund, LP (USO)
iShares Silver Trust (SLV)
Invesco DB G10 Currency Harvest Fund (DBV)
SPDR Bloomberg Barclays 1-3 Month T-Bill (BIL)
Grayscale Bitcoin Trust (GBTC)

We consider three ways to find safe havens for the U.S. stock market based on daily or monthly returns:

  1. Contemporaneous return correlation with the S&P 500 Index during all market conditions at daily and monthly frequencies.
  2. Performance during S&P 500 Index bear markets as defined by the index being below its 10-month simple moving average (SMA10) at the end of the prior month.
  3. Performance during S&P 500 Index bear markets as defined by the index being -20%, -15% or -10% below its most recent peak at the end of the prior month.

Using daily and monthly dividend-adjusted closing prices for the above 15 funds since their respective inceptions, and contemporaneous daily and monthly levels of the S&P 500 Index since 10 months before the earliest inception, all through April 2022, we find that: Keep Reading

XHB Lead the Broad Stock Market?

Do stocks of homebuilders, whose sales are particularly sensitive to interest rate changes, reliably lead the overall stock market. To check, we look at lead-lag relationships between monthly returns for SPDR S&P Homebuilders ETF (XHB) and returns for SPDR S&P 500 ETF Trust (SPY). Using monthly dividend-adjusted returns for XHB and SPY during February 2006 (inception of XHB) through February 2022, we find that: Keep Reading

Housing Starts and Future Stock Market/REIT Returns

Each month, the Census Bureau announces and the financial media report U.S. housing starts as a potential indicator of future U.S. stock market returns. Release date is about two weeks after the month being reported. New releases may substantially revise recent past releases, so that the Census Bureau historical data set effectively has a longer lag. Does this economic indicator convey useful information about future returns for the broad U.S. stock market or for Real Estate Investment Trusts (REIT)? To investigate, we relate returns for the S&P 500 Index (SP500) and for the FTSE NAREIT All REITs total return index (REITs) to changes in housing starts at the monthly release frequency. Using monthly data for SP500 and for seasonally adjusted annualized housing starts starting January 1959, and for REITs starting December 1971, all through February 2022, we find that:

Keep Reading

New Home Sales and Future Stock Market/REIT Returns

Each month, the Census Bureau announces and the financial media report U.S. new home sales as a potential indicator of future U.S. stock market returns. Release date is about three weeks after the month being reported. Moreover, new releases may substantially revise recent past releases, so that the Census Bureau historical dataset effectively has a longer lag. Does this economic indicator convey useful information about future returns for the broad U.S. stock market or for Real Estate Investment Trusts (REIT)? To investigate, we relate returns for the S&P 500 Index (SP500) and for the FTSE NAREIT All REITs total return index (REITs) to changes in new home sales at the monthly release frequency. Using monthly data for SP500 and for seasonally adjusted annualized new homes sales starting January 1963, and for REITs starting December 1971, all through February 2022, we find that: Keep Reading

Overnight Effect Across Asset Classes?

Does the overnight return effect found pervasively among equity markets, as summarized in “Persistence of Overnight/Intraday Equity Market Return Patterns”, also hold for other asset classes? To investigate, we compare open-to-close (O-C) and close-to-open (C-O) average returns, standard deviations of returns and cumulative performances for the exchange-traded funds (ETF) used as asset class proxies in the Simple Asset Class ETF Momentum Strategy (SACEMS). Using daily dividend-adjusted opening and closing prices of these ETFs during mid-December 2007 (inception of the youngest ETF) through early March 2022, we find that: Keep Reading

Recent Interactions of Asset Classes with Effective Federal Funds Rate

How do returns of different asset classes recently interact with the Effective Federal Funds Rate (EFFR)? We focus on monthly changes (simple differences) in EFFR  and look at lead-lag relationships between change in EFFR and returns for each of the following 10 exchange-traded fund (ETF) asset class proxies:

  • Equities:
    • SPDR S&P 500 (SPY)
    • iShares Russell 2000 Index (IWM)
    • iShares MSCI EAFE Index (EFA)
    • iShares MSCI Emerging Markets Index (EEM)
  • Bonds:
    • iShares Barclays 20+ Year Treasury Bond (TLT)
    • iShares iBoxx $ Investment Grade Corporate Bond (LQD)
    • iShares JPMorgan Emerging Markets Bond Fund (EMB)
  • Real assets:
    • Vanguard REIT ETF (VNQ)
    • SPDR Gold Shares (GLD)
    • Invesco DB Commodity Index Tracking (DBC)

Using monthly EFFR and monthly dividend-adjusted prices for the 10 specified ETFs during December 2007 (limited by EMB) through December 2021, we find that: Keep Reading

Recent Interactions of Asset Classes with Economic Policy Uncertainty

How do returns of different asset classes recently interact with uncertainty in government economic policy as quantified by the Economic Policy Uncertainty (EPU) Index? This index at the beginning of each month incorporates from the prior month:

  1. Coverage of policy-related economic uncertainty by prominent newspapers (50% weight).
  2. Number of temporary federal tax code provisions set to expire in future years (one sixth weight).
  3. Level of disagreement in one-year forecasts among participants in the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters for both (a) the consumer price index (one sixth weight) and (b) purchasing of goods and services by federal, state and local governments (one sixth weight).

Because the historical EPU Index series includes substantial revisions to prior months, we focus on monthly percentage changes in EPU Index and look at lead-lag relationships between change in EPU Index and returns for each of the following 10 exchange-traded fund (ETF) asset class proxies:

  • Equities:
    • SPDR S&P 500 (SPY)
    • iShares Russell 2000 Index (IWM)
    • iShares MSCI EAFE Index (EFA)
    • iShares MSCI Emerging Markets Index (EEM)
  • Bonds:
    • iShares Barclays 20+ Year Treasury Bond (TLT)
    • iShares iBoxx $ Investment Grade Corporate Bond (LQD)
    • iShares JPMorgan Emerging Markets Bond Fund (EMB)
  • Real assets:
    • Vanguard REIT ETF (VNQ)
    • SPDR Gold Shares (GLD)
    • Invesco DB Commodity Index Tracking (DBC)

Using monthly levels of the EPU Index and monthly dividend-adjusted prices for the 10 specified ETFs during December 2007 (limited by EMB) through December 2021, we find that: Keep Reading

Recent Interactions of Asset Classes with Inflation (PPI)

How do returns of different asset classes recently interact with inflation as measured by monthly change in the not seasonally adjusted, all-commodities producer price index (PPI) from the U.S. Bureau of Labor Statistics? To investigate, we look at lead-lag relationships between change in PPI and returns for each of the following 10 exchange-traded fund (ETF) asset class proxies:

  • Equities:
    • SPDR S&P 500 (SPY)
    • iShares Russell 2000 Index (IWM)
    • iShares MSCI EAFE Index (EFA)
    • iShares MSCI Emerging Markets Index (EEM)
  • Bonds:
    • iShares Barclays 20+ Year Treasury Bond (TLT)
    • iShares iBoxx $ Investment Grade Corporate Bond (LQD)
    • iShares JPMorgan Emerging Markets Bond Fund (EMB)
  • Real assets:
    • Vanguard REIT ETF (VNQ)
    • SPDR Gold Shares (GLD)
    • Invesco DB Commodity Index Tracking (DBC)

Using monthly total PPI values and monthly dividend-adjusted prices for the 10 specified ETFs during December 2007 (limited by EMB) through December 2021, we find that: Keep Reading

Recent Interactions of Asset Classes with Inflation (CPI)

How do returns of different asset classes recently interact with inflation as measured by monthly change in the not seasonally adjusted, all-items consumer price index (CPI) from the U.S. Bureau of Labor Statistics? To investigate, we look at lead-lag relationships between change in CPI and returns for each of the following 10 exchange-traded fund (ETF) asset class proxies:

  • Equities:
    • SPDR S&P 500 (SPY)
    • iShares Russell 2000 Index (IWM)
    • iShares MSCI EAFE Index (EFA)
    • iShares MSCI Emerging Markets Index (EEM)
  • Bonds:
    • iShares Barclays 20+ Year Treasury Bond (TLT)
    • iShares iBoxx $ Investment Grade Corporate Bond (LQD)
    • iShares JPMorgan Emerging Markets Bond Fund (EMB)
  • Real assets:
    • Vanguard REIT ETF (VNQ)
    • SPDR Gold Shares (GLD)
    • Invesco DB Commodity Index Tracking (DBC)

Using monthly total CPI values and monthly dividend-adjusted prices for the 10 specified ETFs during December 2007 (limited by EMB) through December 2021, we find that: Keep Reading

Rough Net Worth Growth Benchmarks

How fast should individuals plan to grow net worth as they age? To investigate, we examine median levels of household (1) total net worth and (2) net worth excluding home equity from several vintages of U.S. Census Bureau data. We make the following head-of-household age cohort assumptions:

  • “Less than 35 years” means about age 30.
  • “35 to 44 years” means about age 39.
  • “45 to 54 years” means about age 49.
  • “55 to 64 years” means about age 59.
  • “65 to 69 years” means about age 67.
  • “70 to 74 years” means about age 72.
  • “75 and over” means about age 78.

We also assume that wealth growth between these ages is constant via compound annual growth rate (CAGR) calculations. Using median levels of total net worth and net worth excluding home equity from 2000. 2005, 2010, 2014, 2017 and 2019 Census Bureau summary tables, we find that: Keep Reading

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