Strategic Allocation

Can investors use leveraged exchange-traded funds (ETF) to construct attractive versions of simple 60%/40% (60/40) and 40%/60% (40/60) stocks-bonds portfolios? In their March 2020 presentation package entitled “Robust Leveraged ETF Portfolios Extending Classic 40/60 Portfolios and Portfolio Insurance”, flagged by a subscriber, Mikhail Smirnov and Alexander Smirnov consider several variations of classic stocks/bonds portfolios implemented with leveraged ETFs. They ultimately focus on 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)

To validate findings, we consider this portfolio and several 60/40 and 40/60 stocks/bonds portfolios. We look at net monthly performance statistics, along with compound annual growth rate (CAGR), maximum drawdown (MaxDD) based on monthly data and annual Sharpe ratio. To estimate monthly rebalancing frictions, we use 0.5% of amount traded each month. We use average monthly 3-month U.S. Treasury bill yield during a year as the risk-free rate in Sharpe ratio calculations for that year. Using monthly adjusted prices for TQQQ, TMF, TLT and for SPDR S&P 500 ETF Trust (SPY) and Invesco QQQ Trust (QQQ) to construct benchmarks during February 2010 (limited by TQQQ inception) through February 2025, we find that: Keep Reading

A subscriber suggested adding U.S. large-capitalization growth and value funds to the asset class proxy universe in the Simple Asset Class ETF Momentum Strategy (SACEMS) to capture associated growth and value streakiness. To investigate, we select Vanguard Growth Index Fund ETF Shares (VUG) and Vanguard Value Index Fund ETF Shares (VTV) as growth and value proxies. We compare performance statistics for SACEMS Top 1, equal-weighted (EW) Top 2 and EW Top 3 portfolios for:

1. SPY – Baseline SACEMS with SPDR S&P 500 ETF Trust (SPY) as a proxy for U.S. large-capitalization stocks.
2. SPY/VUG/VTV – SACEMS with VUG and VTV added.
3. VUG/VTV – SACEMS with VUG and VTV but without SPY to limit the overall tilt toward U.S. large-capitalization stocks.
4. VUG – SACEMS with VUG substituted for SPY to assess the benefit of growth alone versus value-growth switching.
5. QQQ – SACEMS with Invesco QQQ Trust (QQQ) substituted for SPY to compare VUG versus QQQ as large-capitalization growth stock proxies.

We focus on gross compound annual growth rate (CAGR), maximum drawdown (MaxDD) based on monthly measurements and annual Sharpe ratio (with excess annual return calculated using average monthly yield on 3-month U.S. Treasury bills during a year as the risk-free rate for that year) as key performance statistics. Using monthly dividend-adjusted returns for baseline SACEMS assets, VUG, VTV and QQQ during February 2006 through February 2025, we find that:

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Has concentration of world equity market capitalization in a few technology megacaps disrupted factor investing? In his short February 2025 paper entitled “Implications of Increased Index Concentration for Active Investors”, David Blitz examines implications of the rise of megacap technology stocks for factor portfolio management. He first considers strategies that focus on capturing a single premium from among quality, momentum or low-volatility factors without tracking error control relative to a world index. He then looks at multi-factor strategies with tracking control. Using megacap/world market capitalizations and MSCI World Quality, Momentum, Minimum Volatility and overall market index returns during 2018 through 2024, he finds that: Keep Reading

What is the best type of account to use for a Treasury Inflation Protected Securities (TIPS) ladder, constructed with incremental maturities to generate a constant risk-free stream of real future withdrawals via compounded inflation adjustments? In his February 2025 paper entitled “Best Asset Location for a TIPS Ladder”, Edward McQuarrie models TIPS behaviors and tax rules to determine whether investors should hold TIPS ladders in: a taxable brokerage account; a tax-deferred account such as a 401(k) or traditional IRA; or, a tax-free account such as a Roth IRA. Potential tax treatments of TIPS ladder account withdrawals include:

1. Maturing principal (initial capital), which is not taxed.
2. Ordinary income (coupon).
3. Tax-favored income, such as qualified dividends or long-term capital gains, with a rate as low as half that for ordinary income.

Only taxable brokerage accounts encounter all three treatments. All withdrawals from tax-deferred accounts are treated as ordinary income. Roth withdrawals are always tax-free. His baseline case is a 20-year TIPS ladder with $1 million initial funding, assuming a 2% real coupon at purchase with all maturities and coupon payments occurring at year-end. He initially assumes a 3% annual inflation rate but considers rates varying from 1% to 9%. He focuses on a 24% income tax rate. He discusses Original Issue Discount (OID), unrealized inflation adjustments, which is crucial to differences in tax rates across account types. Based on this modeling, he concludes that:

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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 2025.

The home page, Simple Asset Class ETF Momentum Strategy (SACEMS) and Simple Asset Class ETF Value Strategy (SACEVS) now show preliminary positions for March 2025. SACEMS rankings are close and could change by the close. SACEVS allocations are unlikely to change by the close.

“SACEVS and SACEMS Strategy Momentum?” finds support for belief that a strategy exploiting the relative performance of Simple Asset Class ETF Value Strategy (SACEVS) Best Value and Simple Asset Class ETF Momentum Strategy (SACEMS) Equal-Weighted (EW) Top 2 boosts performance, with focus on a 60%-40% tilt toward the strategy with the stronger past returns. It also considers a full tilt (100%-0%) toward the stronger strategy for one lookback interval. Here, we examine sensitivity of the performance of the full tilt alternative (SACEVS-SACEMS Momentum) across lookback intervals ranging from one to 12 months. This alternative holds either SACEVS Best Value or SACEMS EW Top 2 according to which has the higher past return. We focus on gross compound annual growth rate (CAGR) and gross maximum drawdown (MaxDD) as essential performance metrics. As a benchmark, we use the monthly rebalanced SACEVS Best Value-SACEMS EW Top 2 50%-50% baseline (SACEVS-SACEMS 50-50 Baseline). Using monthly returns for SACEVS Best Value and SACEMS EW Top 2 during July 2006 through January 2025, we find that:

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Does the conventional rule (inferred from 1926-1992 U.S. stocks and bonds data) that retirees can safely withdraw an inflation-adjusted 4% from their retirement accounts annually for at least 30 years hold, after accounting for market frictions? In his February 2025 paper entitled “How the 4% Rule Would Have Failed in the 1960s: Reflections on the Folly of Fixed Rate Withdrawals”, Edward McQuarrie recasts the original study including reasonable frictions/constraints, with focus on those retiring during the 1960s. He generalizes the approach by exploring whether any fixed rate of withdrawal can be sustained across a range of aggressive and conservative asset allocations. Finally, he looks at results thus far for individuals who retired in 2000. Using newly assembled net performance data for mutual funds during 1926 through 2023 and exchange-traded alternatives to such funds during 2000 through 2024, he finds that: Keep Reading

Would using a rolling, rather than an inception-to-date (ITD), lookback window for calibration of the Best Value and Weighted versions of the “Simple Asset Class ETF Value Strategy” (SACEVS) improve their performances? SACEVS allocates funds to 3-month Treasury bills (T-bill or Cash), iShares 20+ Year Treasury Bond ETF (TLT), iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) and/or SPDR SPDR S&P 500 ETF Trust (SPY) according to current valuations of term, credit and equity risk premiums. Baseline model valuations derive from ITD historical values of these premiums back to March 1989. We compare the ITD approach to two rolling windows that continually add the newest and drop the oldest historical inputs to make SACEVS more adaptive, as follows:

1. Baseline (ITD) – sets current valuations based on the full available history.
2. 20-year Rolling Window – sets current valuations based on the full available history until February 2009 (when 20 years of history becomes available) and then uses only the most recent 20 years of history.
3. 10-year Rolling Window – sets current valuations based only on the most recent 10 years of history.

To compare the three approaches, we focus on gross compound annual growth rate (CAGR), gross annual Sharpe ratio (with average T-bill yield during a year as the risk-free rate for that year) and maximum drawdown (MaxDD). For all variations, we ignore trading (switching/rebalancing) frictions, which are modest for SACEVS, and any tax implications of trading. Using monthly dividend-adjusted closes for the above assets during July 2002 through January 2025, we find that:

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A subscriber requested a test of Ray Dalio‘s All Weather (AW) portfolio with different rebalancing frequencies, allocated to exchange-traded funds (ETF) as asset class proxies as follows:

30% – Vanguard Total Stock Market (VTI)
40% – iShares 20+ Year Treasury (TLT)
15% – iShares 7-10 Year Treasury (IEF)
7.5% – SPDR Gold Shares (GLD)
7.5% – Invesco DB Commodity Tracking (DBC)

To investigate, we test:

• AW portfolios rebalanced monthly (AW-1), quarterly (AW-3), semiannually at the ends of June and December (AW-6) or annually at the end of December (AW-12).
• As a benchmark, a 60%-40% VTI-TLT portfolio rebalanced annually (60/40-12).
• For comparison, the Simple Asset Class ETF Momentum Strategy equally weighted Top 2 portfolio (SACEMS EW Top 2), the Simple Asset Class ETF Value Strategy (SACEVS) Best Value portfolio and a 50%-50% combination of these two portfolios (SACEVS-SACEMS 50-50).

We consider the following gross performance metrics, all based on monthly measurements: average monthly return, standard deviation of monthly returns, compound annual growth rate (CAGR), maximum drawdown (MaxDD) and Sharpe ratio (with the 3-month Treasury bill yield as the risk-free rate). We also compare number of rebalance actions for each portfolio. Using monthly dividend-adjusted returns for the specified assets during February 2006 (limited by DBC) through December 2024, we find that: Keep Reading