Strategic Allocation

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 February 2021.

The home page, Simple Asset Class ETF Momentum Strategy (SACEMS) and Simple Asset Class ETF Value Strategy (SACEVS) now show preliminary positions for March 2021. The top three SACEMS ETFs are unlikely to change by the close. SACEVS allocations are unlikely to change by the close.

A subscriber asked for a 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:

• SPDR S&P 500 (SPY) for stocks.
• iShares 20+ Year Treasury Bond (TLT) for bonds.
• Invesco MSCI Global Timber (CUT) for lumber.
• SPDR Gold Shares (GLD) for gold.

Using weekly dividend-adjusted prices for SPY, TLT, CUT and GLD during early February 2008 (limited by inception of CUT) through early February 2021 and roughly matched start and stop performance for monthly SACEVS-SACEMS 50-50 , we find that:

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Investors seeking low-cost, automated, tax-efficient and potentially alpha-generating solutions increasingly follow model portfolios of exchange-traded funds (ETF). Is there a top-down way to characterize those models? In their November 2020 paper entitled “Using Data Science to Identify ETF Model Followers”, Ananth Madhavan and Aleksander Sobczyk apply machine learning methods and cluster analysis to identify all models using at least three iShares ETFs based on monthly holdings data. Using monthly data on positions and accounts holding those positions across all iShares ETFs (370 at the end of the sample period) during January 2013 through June 2020, they find that:

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Can diversification across economic states improve portfolio performance? In their November 2020 paper entitled “Investing Through a Macro Factor Lens”, Harald Lohre, Robert Hixon, Jay Raol, Alexander Swade, Hua Tao and Scott Wolle study interactions between three economic “factors” (growth, defensive/U.S. Treasuries and inflation) and portfolio building blocks (asset classes and conventional factor portfolios). Their proxies for economic factors are: broad equity market for growth; U.S. Treasuries for defensive; and, spread between inflation-linked bonds and U.S. Treasuries for inflation. To diversify across economic states, they calculate historical performance of each portfolio building block during each of four economic regimes: (1) rising growth and rising inflation; (2) rising growth and falling inflation; (3) falling growth and rising inflation; and, (4) falling growth and falling inflation. They then look at benefits of adding defensive and inflation economic factor overlays to a classis 60%/40% global equities/bonds portfolio. Using monthly economic factor data and asset class/conventional factor portfolio returns during February 2001 through May 2020, they find that: Keep Reading

A subscriber asked whether the Simple Asset Class ETF Momentum Strategy (SACEMS) exhibits monthly calendar effects. In investigating, we also look at the Simple Asset Class ETF Value Strategy (SACEVS)? We consider the “Best Value” (most undervalued asset) and “Weighted” (assets weighted by degree of undervaluation) versions of SACEVS. We consider the Top 1, equally weighted “(EW) Top 2” and “EW Top 3” versions of SACEMS, which each month equally weights the top one, two or three of nine ETFs/cash with the highest total returns over a specified lookback interval. We further compare seasonalities of these strategies to those of their benchmarks: for SACEVS, a monthly rebalanced 60% stocks-40% bonds portfolio (60-40); and, for SACEMS an equally weighted and monthly rebalanced portfolio of the SACEMS universe (EW All). Using monthly gross total returns for SACEVS since August 2002 and for SACEMS since July 2006, both through January 2021, we find that:

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A subscriber asked for a 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 the following monthly rebalanced allocations to three exchange-traded funds (3-ETF):

• 30% Vanguard Total Stock Market Index Fund (VTI).
• 30% Vanguard Total International Stock Index Fund (VXUS).
• 40% Vanguard Total Bond Market Index Fund (BND).

Using monthly returns for SACEVS-SACEMS 50-50 and month-end dividend-adjusted prices for VTI, VXUS and BND during January 2011 (limited by inception of VXUS) through January 2021, we find that: Keep Reading

Can investors use leveraged exchange-traded funds (ETF) as building blocks for long-term portfolios? In his January 2021 presentation package entitled “One Year Later. Leveraged ETFs in Portfolio Construction and Portfolio Protection”, Mikhail Smirnov updates multi-year performance of a monthly rebalanced partially 3X-leveraged portfolio consisting of:

• 40% ProShares UltraPro QQQ (TQQQ)
• 20% Direxion Daily 20+ Year Treasury Bull 3X Shares (TMF)
• 40% iShares 20+ Year Treasury Bond ETF (TLT)

The last three years are out-of-sample with respect to specification of this portfolio. He also looks at a more conservative portfolio of 20% TQQQ and 80% TLT, rebalanced monthly. Using pre-inception simulated and actual monthly total returns for these ETFs during January 1, 2005 through January 15, 2021, he finds that: Keep Reading

A European subscriber asked about the effect of the dollar-euro exchange rate on the Simple Asset Class ETF Value Strategy (SACEVS) and the Simple Asset Class ETF Momentum Strategy (SACEMS). To investigate, we each month adjust the gross returns for these strategies for the change in the dollar-euro exchange rate that month. We consider all strategy variations: Best Value and Weighted for SACEVS; and, Top 1, equally weighted (EW) Top 2 and EW Top 3 for SACEVS. We focus on SACEVS Best Value and SACEMS EW Top 3. We consider effects on four gross performance metrics: average monthly return; standard deviation of monthly returns; compound annual growth rate (CAGR); and, maximum drawdown (MaxDD). Using monthly returns for the strategies and monthly changes in the dollar-euro exchange rate since August 2002 for SACEVS and since July 2006 for SACEMS, both through December 2020, we find that: Keep Reading

The “Simple Asset Class ETF Value Strategy” (SACEVS) allocates across 3-month Treasury bills (Cash, or T-bill), iShares 20+ Year Treasury Bond (TLT), iShares iBoxx $ Investment Grade Corporate Bond (LQD) and SPDR S&P 500 (SPY) according to the relative valuations of term, credit and equity risk premiums. Does applying a simple moving average (SMA) filter to SACEVS allocations improve its performance? Since many technical traders use a 10-month SMA (SMA10), we apply SMA10 filters to dividend-adjusted prices of TLT, LQD and SPY allocations. If an allocated asset is above (below) its SMA10, we allocate as specified (to Cash). This rule does not apply to any Cash allocation. We focus on gross compound annual growth rates (CAGR), maximum drawdowns (MaxDD) and annual Sharpe ratios (using average monthly T-bill yield during a year as the risk-free rate for that year) of SACEVS Best Value and SACEVS Weighted portfolios. We compare to baseline SACEVS as currently tracked and to the SMA rule applied to a 60%-40% monthly rebalanced SPY-TLT benchmark portfolio (60-40). Finally, we test sensitivity of main findings to varying the SMA lookback interval. Using SACEVS historical data, monthly dividend-adjusted closing prices for the asset class proxies and yield for Cash during July 2002 (the earliest all funds are available) through December 2020, we find that:

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