Objective research to aid investing decisions

Value Investing Strategy (Strategy Overview)

Allocations for July 2020 (Final)
Cash TLT LQD SPY

Momentum Investing Strategy (Strategy Overview)

Allocations for July 2020 (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.

Update of Findings for a Highly Influential Asset Allocation Paper

“A Quantitative Approach to Tactical Asset Allocation” is a highly influential paper (over 234,000 downloads from SSRN ) about asset allocation based on trend following, with the original version posted in early 2007 and a revision in early 2013. The strategy in that paper applies a 10-month simple moving average (SMA10) timing rule separately to each of five total return indexes as components of an equally weighted, monthly rebalanced portfolio: (1) S&P 500 Index; (2) 10-Year Treasury note constant duration index; (3) MSCI EAFE international developed markets index; (4) Goldman Sachs Commodity Index (GSCI); and, (5) National Association of Real Estate Investment Trusts index. Specifically, at the end of each month, the model enters from cash (exits to cash) any index crossing above (below) its SMA10. Entry and exit dates are the same a signal dates (requiring some anticipation of signals before the close). This paper (summarized in “Asset Allocation Based on Trends Defined by Moving Averages”) spawned hundreds (thousands?) of trend following/momentum-based asset allocation strategies since publication, including to some degree the Simple Asset Class ETF Momentum Strategy (SACEMS). How well has the original strategy performed during ascendance of exchange-trade funds (ETF) as asset class proxies? To evaluate, we apply the strategy (QA-TAA) to the following five asset class proxy ETFs and cash:

  • SPDR S&P 500 (SPY)
  • iShares Barclays 20+ Year Treasury Bond (TLT)
  • iShares MSCI EAFE Index (EFA)
  • PowerShares DB Commodity Index Tracking (DBC)
  • Vanguard REIT ETF (VNQ)
  • 3-month Treasury bills (Cash)

We consider buying and holding SPY, the SMA10 ruled applied to SPY (SPY:SMA10) and an equally weighted, monthly rebalanced portfolio of the five asset class ETFs (EW All) as benchmarks. Using monthly dividend-adjusted prices for the specified assets during February 2006 (limited by DBC) through June 2020, 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 June 2020.

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 July 2020. SACEMS rankings are unlikely to change by the close. SACEVS allocations are currently sensitive to yields and S&P 500 Index level, so they may shift a little by the close.

Demise of Multi-class Investing?

Does multi-class investing boost performance for sophisticated investors such as educational endowments? In his June 2020 paper entitled “Endowment Performance and the Demise of the Multi-Asset-Class Model”, Richard Ennis examines recent performance of educational endowment funds, with focus on allocations to alternative assets. Using performance data from a report on 774 university endowments and from hand-collected annual reports for some large individual endowments during June 2008 through June 2019, he finds that: Keep Reading

SACEMS Portfolio-Asset Addition Testing

Does adding an exchange-traded fund (ETF) or note (ETN) to the Simple Asset Class ETF Momentum Strategy (SACEMS) boost performance via consideration of more trending/diversifying options? To investigate, we add the following 22 ETF/ETN asset class proxies one at a time to the base set and measure effects on the Top 1, equally weighted (EW) Top 2 and EW Top 3 SACEMS portfolios:

AlphaClone Alternative Alpha (ALFA)
JPMorgan Alerian MLP Index (AMJ)
UBS ETRACS Wells Fargo Business Development Companies (BDCS)
Vanguard Total Bond Market (BND)
SPDR Barclays International Treasury Bond (BWX)
iShares MSCI Frontier 100 (FM)
First Trust US IPO Index (FPX)
iShares iBoxx High-Yield Corporate Bond (HYG)
iShares 7-10 Year Treasury Bond (IEF)
iShares Latin America 40 (ILF)
iShares National Muni Bond ETF (MUB)
PowerShares Closed-End Fund Income Composite (PCEF)
PowerShares Global Listed Private Equity (PSP)
IQ Hedge Multi-Strategy Tracker (QAI)
PowerShares QQQ Trust (QQQ)
SPDR Dow Jones International Real Estate (RWX)
ProShares UltraShort S&P 500 (SDS)
iShares Short Treasury Bond (SHV)
iShares TIPS Bond (TIP)
United States Oil (USO)
ProShares VIX Short-Term Futures (VIXY)
ProShares VIX Mid-Term Futures (VIXM)

We focus on gross compound annual growth rate (CAGR) and gross maximum drawdown (MaxDD) as key performance statistics, ignoring monthly reformation costs. Using end-of-month, dividend-adjusted returns for all assets as available during February 2006 through May 2020, we find that: Keep Reading

SACEMS Portfolio-Asset Exclusion Testing

Are all of the potentially trending/diversifying asset class proxies used in the Simple Asset Class ETF Momentum Strategy (SACEMS) necessary? Might one or more of them actually be harmful to performance? To investigate, we each month rank the nine SACEMS assets based on past return with one excluded (nine separate test series) and reform the Top 1, equally weighted (EW) Top 2 and EW Top 3 SACEMS portfolios. We focus on gross compound annual growth rate (CAGR) and gross maximum drawdown (MaxDD) as key performance statistics, ignoring monthly portfolio reformation costs. Using end-of-month, dividend-adjusted returns for SACEMS assets during February 2006 through May 2020, we find that: Keep Reading

Home Prices and the Stock Market

Homes typically represent a substantial fraction of investor wealth. Are there reliable relationships between U.S. home prices and the U.S. stock market? For example, does a rising stock market stimulate home prices? Do falling home prices point to offsetting liquidation of equity positions. Do homes effectively diversify equity holdings? Measurements are:

Using these sources, we find that:

Keep Reading

Exploit U.S. Stock Market Dips with Margin?

A subscriber requested evaluation of a strategy that seeks to exploit U.S stock market reversion after dips by temporarily applying margin. Specifically, the strategy:

  • At all times holds the U.S. stock market.
  • When the stock market closes down more than 7% from its high over the past year, augments stock market holdings by applying 50% margin.
  • Closes each margin position after two months.

To investigate, we assume:

  • The S&P 500 Index represents the U.S. stock market for calculating drawdown over the past year (252 trading days).
  • SPDR S&P 500 (SPY) represents the market from a portfolio perspective.
  • We start a margin augmentation at the same daily close as the drawdown signal by slightly anticipating the drawdown at the close.
  • 50% margin is set at the opening of each augmentation and there is no rebalancing to maintain 50% margin during the two months (42 trading days) it is open.
  • If S&P 500 Index drawdown over the past year is still greater than 7% after ending a margin augmentation, we start a new margin augmentation at the next close.
  • Baseline margin interest is U.S. Treasury bill (T-bill) yield plus 1%, debited daily.
  • Baseline one-way trading frictions for starting and ending margin augmentations are 0.1% of margin account value.
  • There are no tax implications of trading.

We use buying and holding SPY without margin augmentation as a benchmark. Using daily levels of the S&P 500 Index, daily dividend-adjusted SPY prices and daily T-bill yields from the end of January 1993 (limited by SPY) through May 2020, we find that: Keep Reading

Enhancement of Dual Momentum with Just Three Assets?

In response to “Review of Dual Momentum with Just Three Assets”, a subscriber suggested adding gold in competition with long-term U.S. Treasury bonds as a safe haven from equities. To test this potential enhancement of Accelerating Dual Momentum (ADM), we each month:

  1. Calculate for each of SPDR S&P 500 (SPY), iShares MSCI EAFE Small-Cap ETF (SCZ), iShares 20+ Year Treasury Bond (TLT) and SPDR Gold Shares (GLD) the sum of its 1-month, 3-month and 6-month past returns.
  2. If sums for both SPY and SCZ are negative, buy the one of TLT and GLD with the higher sum.
  3. If both sums for SPY and SCZ are not negative, buy the one with the higher sum.

Using end-of-month dividend-adjusted prices of these ETFs during December 2007 (limited by SCZ) through April 2020, we find that: Keep Reading

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 April 2020, we find that: Keep Reading

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