Objective research to aid investing decisions

Value Investing Strategy (Strategy Overview)

Allocations for June 2024 (Final)
Cash TLT LQD SPY

Momentum Investing Strategy (Strategy Overview)

Allocations for June 2024 (Final)
1st ETF 2nd ETF 3rd ETF

Strategic Allocation

Is there a best way to select and weight asset classes for long-term diversification benefits? These blog entries address this strategic allocation question.

Tech Premium Boost for Simplest Asset Class Momentum Strategy?

In response to “Tech Equity Premium?”, a subscriber asked about substituting Invesco QQQ Trust (QQQ) for SPDR S&P 500 (SPY) in the “Simplest Asset Class ETF Momentum Strategy?”, which each month holds SPY or iShares Barclays 20+ Year Treasury Bond (TLT) depending on which has the higher total return over the last three months. To investigate, we run a horse race between the strategy executed with SPY (SPY-TLT) and the strategy executed with QQQ (QQQ-TLT). We focus on compound annual growth rates (CAGR) and maximum drawdowns (MaxDD) as performance metrics and assess robustness across lookback intervals of one to 12 months. Using monthly dividend-adjusted prices for SPY, QQQ and TLT during July 2002 (limited by TLT) through May 2024, we find that: Keep Reading

SACEMS, SACEVS and Trading Calendar Updates

We have updated monthly allocations and performance data for the Simple Asset Class ETF Momentum Strategy (SACEMS) and the Simple Asset Class ETF Value Strategy (SACEVS). We have also updated performance data for the Combined Value-Momentum Strategy.

We have updated the Trading Calendar to incorporate data for May 2024.

Preliminary SACEMS and SACEVS Allocation Updates

The home page, Simple Asset Class ETF Momentum Strategy (SACEMS) and Simple Asset Class ETF Value Strategy (SACEVS) now show preliminary positions for June 2024. SACEMS rankings probably will not change by the close, though the contest between second and third is somewhat tight. SACEVS allocations are unlikely to change by the close.

Review of a Long-short Treasuries ETF Timing Strategy

After seeing “Review of the Quantified Market Psychology Strategy”, reader Steve Ruoff requested review of his U.S. Treasuries timing strategy as recorded at Timertrac (Duration Strategy), which approximately every four weeks generates allocations to: Direxion Daily 7-10 Year Treasury Bull 3X Shares (TYD); Direxion Daily 7-10 Year Treasury Bear 3X Shares (TYO); and cash, for which we use SPDR Bloomberg 1-3 Month T-Bill ETF (BIL). Strategy inputs encompass:

  1. Current economic activity, inflation metrics and monetary policy factors.
  2. Valuation estimates focused on long-term mean reversion thresholds.
  3. Technical rules focused on price momentum.

To investigate, we download the Timertrac trade history for the Duration Strategy and replicate its performance using the selected exchange-traded funds (ETF). We look at average trading activity, average trade return, standard deviation of trade returns, trade reward/risk (average return divided by standard deviation), compound annual growth rate (CAGR) and maximum drawdown (MaxDD) at the trade frequency. We look at buying and holding iShares 7-10 Year Treasury Bond ETF (IEF) as an alternative and also look at buying and holding SPDR S&P 500 ETF Trust (SPY). Using the Duration Strategy trade history and daily adjusted opening prices for all specified ETFs during mid-January 2014 through early March 2024, we find that: Keep Reading

Update of a Lumber/Gold Risk-on/Risk-off Strategy

A subscriber asked for an update of the performance comparison between 50% Simple Asset Class ETF Value Strategy (SACEVS) Best Value-50% Simple Asset Class ETF Momentum Strategy (SACEMS) equal-weighted top two (EW Top 2), rebalanced monthly (SACEVS-SACEMS 50-50), and a strategy that is each week in stocks or bonds according to whether the return on lumber is greater than the return on gold over the past 13 weeks (L-G Strategy). To test the latter strategy we use the following exchanged-traded fund (ETF) proxies:

Using weekly dividend-adjusted prices for SPY, TLT, CUT and GLD during early February 2008 (limited by inception of CUT) through April 2024 and roughly matched start and stop performance for monthly SACEVS-SACEMS 50-50 , we find that:

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Yield-based Allocation to Stocks and Bonds

Can investors beat a traditional 60%-40% stocks-bonds portfolio by adjusting allocations based on the earnings yield of stocks and the current yield of government bonds? In his March 2024 paper entitled “A Yield-based Asset Ratio to Boost Minimum Investment Returns”, Arthur Eschenlauer tests a strategy that allocates to the S&P 500 Index or 10-year U.S. Treasury notes (T-note) via a Yield-based Asset Ratio strategy (YBAR), specified as follows:

  • Compute minimum and maximum stock allocations that vary with S&P 500 long-term past earnings yield and current nominal T-note yield. The earnings yield is average earnings over the past 10 years divided by stock index level.
  • Buy the stock index incrementally to rise to the minimum allocation whenever the stock allocation falls below the minimum minus 6% (a margin of safety).
  • Sell the stock index incrementally to fall to the maximum allocation whenever the stock allocation rises above the maximum allocation plus 6% (a margin of folly).
  • Whenever the stock index is very high, apply a cap to the stock allocation (a margin of reversion). The margin of reversion reflects how the earnings yield stands relative to historical values.

YBAR testing assumes 6% minimum acceptable stock allocation, 85% maximum acceptable stock allocation, 25% maximum reversion hazard and monthly portfolio assessment. Using Robert Shiller’s data as proxies for S&P 500 Index levels and earnings and for T-note yields during 1911 through 2022, he finds that: Keep Reading

Testing a 70-30 SPY-BIL Strategy

A subscriber asked for assessment of a strategy that holds 70% SPDR S&P 500 ETF Trust (SPY) and 30% SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) (SPY-BIL 70-30), rebalanced every eight weeks, with explicit comparison to the 50% Simple Asset Class ETF Value Strategy Best Value-50% Simple Asset Class ETF Momentum Strategy Equal-Weighted Top 2 combined strategy (Best Value-EW Top 2). We measure performance of SPY-BIL 70-30 at 8-week intervals to match the specified rebalancing schedule. We measure performance of Best Value-EW Top 2 bimonthly for approximate comparability. We focus on 8-week or bimonthly return statistics, along with compound annual growth rates (CAGR) and maximum drawdowns (MaxDD). We also look at buy-and-hold SPY (SPY) as a simple alternative. Using weekly SPY and BIL dividend-adjusted prices and monthly Best Value -EW Top 2 returns from late May 2007 (BIL inception) through early February 2024, we find that: Keep Reading

Limited Rebalancing for SACEMS?

A subscriber observed that backtesting of momentum-based trading systems typically assumes perfect rebalancing each month whether or not they select new assets. Would delaying rebalancing until new assets are selected improve strategy performance? To investigate, we compare the following two versions of the Simple Asset Class ETF Momentum Strategy (SACEMS) equal-weighted (EW) Top 2 portfolio:

  1. Rinse-and-Repeat – each month rebalance the two positions to equal weights. This is the assumption for tracked SACEMS.
  2. Let-It-Ride – rebalance the two positions to equal weights only when the strategy selects two new assets. In other words, as long as at least one of the two selections is a holdover from the prior month, let the two positions drift away from equal weights.

Using monthly returns for the top two SACEMS selections during July 2006 through February 2024, we find that: Keep Reading

Horse Race: SSO or QQQ vice SPY in SACEVS and SACEMS?

Referring to “Substitute QQQ for SPY in SACEVS and SACEMS?” and “Conditionally Substitute SSO for SPY in SACEVS and SACEMS?”, a subscriber requested a horse race for boosting the performance of the Simple Asset Class ETF Value Strategy (SACEVS) and the Simple Asset Class ETF Momentum Strategy (SACEMS), and thereby the Combined Value-Momentum Strategy (SACEVS-SACEMS), based on substituting:

  1. ProShares Ultra S&P500 (SSO) for SPDR S&P 500 ETF Trust (SPY) in portfolio holdings, but not in SACEMS asset ranking calculations.
  2. Invesco QQQ Trust (QQQ) for SPY in both portfolio holdings and SACEMS asset ranking calculations.

In conducting the horse race, we focus on gross compound annual growth rate (CAGR), maximum drawdown (MaxDD) and gross annual Sharpe ratio as key performance metrics. In Sharpe ratio calculations, we employ the average monthly yield on 3-month U.S. Treasury bills during a year as the risk-free rate for that year. Using monthly total (dividend-adjusted) returns for SACEVS assets, SACEMS assets, SSO and QQQ as available through February 2024, we find that: Keep Reading

Substitute QQQ for SPY in SACEVS and SACEMS?

Subscribers asked whether substituting Invesco QQQ Trust (QQQ) for SPDR S&P 500 (SPY) in the Simple Asset Class ETF Value Strategy (SACEVS) and the Simple Asset Class ETF Momentum Strategy (SACEMS) improves outcomes. To investigate, we substitute monthly QQQ dividend-adjusted returns for SPY dividend-adjusted returns in the two model strategies. We then compare the modified performance with the original baseline performance, including: gross compound annual growth rates (CAGR) at various horizons, average gross annual returns, standard deviations of gross annual returns, gross annual Sharpe ratios and maximum drawdowns (MaxDD) based on monthly measurements. In Sharpe ratio calculations, we employ the average monthly yield on 3-month U.S. Treasury bills during a year as the risk-free rate for that year. Using the specified methodology and data to generate SACEVS monthly returns starting August 2002 and SACEMS monthly returns starting July 2006, all through January 2024, we find that:

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