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

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.

SACEMS with Inverse VIX-based Lookback Intervals

One concern about simple momentum strategies is data snooping bias impounded in selection of the lookback interval(s) used to measure asset momentum. To circumvent this concern, we consider the following argument:

  • The CBOE Volatility Index (VIX) broadly indicates the level of financial markets distress and thereby the tendency of investors to act complacently (when VIX is low) or to act in panic (when VIX is high).
  • Complacency translates to resistance in changing market outlook (long memory and lookback intervals), while panic translates to rapid changes of mind (short memory and short lookback intervals).
  • The inverse of VIX is therefore indicative of the actual aggregate current lookback interval affecting investor actions.

We test this argument by:

  • Setting a range for VIX using monthly historical closes from January 1990 through July 2002, before the sample period used for any tests of the Simple Asset Class ETF Momentum Strategy (SACEMS).
  • Applying buffer factors to the bottom and top of this actual inverse VIX range to recognize that it could break above or below the historical range in the future.
  • Segmenting the buffer-extended inverse VIX range into 12 equal increments and mapping these increments by rounding into momentum lookback intervals of 1 month (lowest segment) to 12 months (highest segment).
  • Applying this same method to future end-of-month inverse VIX levels to select the SACEMS lookback interval for the next month.

We test the top one (Top 1), the equally weighted top two (EW Top 2) and the equally weighted top three (EW Top 3) SACEMS portfolios. We focus on compound annual growth rate (CAGR), maximum drawdown based on monthly measurements, annual returns and Sharpe ratio as key performance statistics. To calculate excess annual returns for the Sharpe ratio, we use average monthly yield on 3-month Treasury bills during a year as the risk-free rate for that year. Benchmarks are these same statistics for tracked SACEMS. Using monthly levels of VIX since inception in January 1990 and monthly dividend-adjusted prices of SACEMS assets since February 2006 (initial availability of a commodities ETF), all through July 2022, we find that: Keep Reading

SACEVS-SACEMS for Value-Momentum Diversification

Are the “Simple Asset Class ETF Value Strategy” (SACEVS) and the “Simple Asset Class ETF Momentum Strategy” (SACEMS) mutually diversifying. To check, based on feedback from subscribers about combinations of interest, we look at three equal-weighted (50-50) combinations of the two strategies, rebalanced monthly:

  1. 50-50 Best Value – EW Top 2: SACEVS Best Value paired with SACEMS Equally Weighted (EW) Top 2 (aggressive value and somewhat aggressive momentum).
  2. 50-50 Best Value – EW Top 3: SACEVS Best Value paired with SACEMS EW Top 3 (aggressive value and diversified momentum).
  3. 50-50 Weighted – EW Top 3: SACEVS Weighted paired with SACEMS EW Top 3 (diversified value and diversified momentum).

We consider as a benchmark a simple technical strategy (SPY:SMA10) that holds SPDR S&P 500 ETF Trust (SPY) when the S&P 500 Index is above its 10-month simple moving average and 3-month U.S. Treasury bills (Cash, or T-bills) when below. We also test sensitivity of results to deviating from equal SACEVS-SACEMS weights. Using monthly gross returns for SACEVS, SACEMS, SPY and T-bills during July 2006 through July 2022, we find that: Keep Reading

Are iShares Core Allocation ETFs Attractive?

The four iShares Core Asset Allocation exchange-traded funds (ETF) offer exposures to U.S. stocks, global stocks and bonds semiannually rebalanced to fixed weights, as follows.

  1. iShares Core Conservative Allocation (AOK) – 30% stocks and 70% bonds (30-70).
  2. iShares Core Moderate Allocation (AOM) – 40% stocks and 60% bonds (40-60).
  3. iShares Core Growth Allocation (AOR) – 60% stocks and 40% bonds (60-40).
  4. iShares Core Aggressive Allocation (AOA) – 80% stocks and 20% bonds (80-20).

Each fund holds a portfolio of seven iShares Core stocks and bonds ETFs, thereby compounding management costs and fees. Do these funds of funds offer attractive performance? To investigate, we compare performance statistics for these funds with those for comparably weighted and rebalanced combinations of SPDR S&P 500 Trust (SPY) and iShares 20+ Year Treasury Bond (TLT), or SPY and iShares iBoxx $ Investment Grade Corporate Bond (LQD). We start tests at the end of December 2008 (about a month after inception of the asset allocation ETFs). We ignore semiannual rebalancing frictions for the SPY-TLT and SPY-LQD comparison strategies. Using semiannual dividend-adjusted prices for all specified funds during December 2008 through June 2022, we find that: Keep Reading

Update of Findings for a Highly Influential Asset Allocation Paper

“A Quantitative Approach to Tactical Asset Allocation” is a highly influential paper (over 253,000 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 as 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 does the original strategy perform 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 ETF Trust (SPY)
  • iShares Barclays 20+ Year Treasury Bond ETF (TLT)
  • iShares MSCI EAFE ETF (EFA)
  • Invesco DB Commodity Index Tracking Fund (DBC)
  • Vanguard Real Estate Index Fund (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 2022, we find 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 24 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)
VanEck Vectors BDC Income (BIZD)
Vanguard Total Bond Market (BND)
SPDR Barclays International Treasury Bond (BWX)
iShares MSCI Emerging Markets (EEM)
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)
Invesco Closed-End Fund Income Composite (PCEF)
Invesco Global Listed Private Equity (PSP)
IQ Hedge Multi-Strategy Tracker (QAI)
Invesco 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)
Invesco DB US Dollar Index Bullish Fund (UUP)
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 June 2022, 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 June 2022, we find that: Keep Reading

SACEVS-SACEMS Leverage Sensitivity Tests

“SACEMS with Margin” investigates the use of target 2X leverage via margin to boost the performance of the “Simple Asset Class ETF Momentum Strategy” (SACEMS). “SACEVS with Margin” investigates the use of target 2X leverage via margin to boost the performance of the “Simple Asset Class ETF Value Strategy” (SACEVS). In response, a subscriber requested a sensitivity test of 1.25X, 1.50X and 1.75X leverage targets. To investigate effects of these leverage targets, we separately augment SACEVS Best Value, SACEMS EW Top 2 and the equally weighted combination of these two strategies by: (1) initially applying target leverage via margin; (2) for each month with a positive portfolio return, adding margin at the end of the month to restore target leverage; and, (3) for each month with a negative portfolio return, liquidating shares at the end of the month to pay down margin and restore target leverage. Margin rebalancings are concurrent with portfolio reformations. We focus on gross monthly Sharpe ratiocompound annual growth rate (CAGR) and maximum drawdown (MaxDD) for committed capital as key performance statistics. We use the 3-month Treasury bill (T-bill) yield as the risk-free rate. Using monthly total (dividend-adjusted) returns for the specified assets since July 2002 for SACEVS and since July 2006 for SACEMS, both through May 2022, we find that:

Keep Reading

SACEVS with Margin

Is leveraging with margin a good way to boost the performance of the “Simple Asset Class ETF Value Strategy” (SACEVS)? To investigate effects of margin, we augment SACEVS by: (1) initially applying 2X leverage via margin (limited by Federal Reserve Regulation T); (2) for each month with a positive portfolio return, adding margin at the end of the month to restore 2X leverage; and, (3) for each month with a negative portfolio return, liquidating shares at the end of the month to pay down margin and restore 2X leverage. Margin rebalancings are concurrent with portfolio reformations. We focus on gross monthly Sharpe ratiocompound annual growth rate (CAGR) and maximum drawdown (MaxDD) for committed capital as key performance statistics for Best Value (which picks the most undervalued premium) and Weighted (which weights all undervalued premiums according to degree of undervaluation) variations of SACEVS. We use the 3-month Treasury bill (T-bill) yield as the risk-free rate and consider a range of margin interest rates as increments to this yield. Using monthly total returns for SACEVS and monthly T-bill yields during July 2002 through May 2022, we find that:

Keep Reading

SACEMS with Margin

Is leveraging with margin a good way to boost the performance of the “Simple Asset Class ETF Momentum Strategy” (SACEMS)? To investigate effects of margin, we augment SACEMS by: (1) initially applying 2X leverage via margin (limited by Federal Reserve Regulation T); (2) for each month with a positive portfolio return, adding margin at the end of the month to restore 2X leverage; and, (3) for each month with a negative portfolio return, liquidating shares at the end of the month to pay down margin and restore 2X leverage. Margin rebalancings are concurrent with portfolio reformations. We focus on gross monthly Sharpe ratiocompound annual growth rate (CAGR) and maximum drawdown (MaxDD) for committed capital as key performance statistics for the Top 1, equally weighted (EW) Top 2 and EW Top 3 portfolios of monthly winners. We use the 3-month Treasury bill (T-bill) yield as the risk-free rate and consider a range of margin interest rates as increments to this yield. Using monthly gross total returns for SACEMS and monthly T-bill yields during July 2006 through May 2022, we find that:

Keep Reading

Very Simple Asset Class ETF Momentum Strategy (VSACEMS) with DBC

In response to Very Simple Asset Class ETF Momentum Strategy (VSACEMS), a subscriber requested evaluation of an alternative VSACEMS that considers only the following three exchange-traded funds (ETF):

  • SPDR S&P 500 (SPY)
  • iShares Barclays 20+ Year Treasury Bond (TLT)
  • Invesco DB Commodity Index Tracking (DBC)

To evaluate, we test a strategy that each month picks the one of these ETFs with the highest total return over a set momentum ranking (lookback) interval. We consider lookback intervals of one to 12 months. We then select one of these lookback intervals and generate performance statistics similar to those for SACEMS. We consider three benchmarks:

  1. SPY – buy and hold SPY.
  2. SPY:SMA10 Cash – Hold SPY (3-month U.S. Treasury bills) when SPY is above (below) its 10-month simple moving average (SMA10) at the end of the prior month.
  3. SPY:SMA10 TLT – Hold SPY (TLT) when SPY is above (below) its SMA10 at the end of the prior month.

Using monthly dividend-adjusted prices for the above three assets during February 2006 (limited by DBC) through April 2022, we find that: Keep Reading

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