Objective research to aid investing decisions

Value Investing Strategy (Strategy Overview)

Allocations for October 2020 (Final)
Cash TLT LQD SPY

Momentum Investing Strategy (Strategy Overview)

Allocations for October 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.

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

Review of the Golden Butterfly Portfolio

A subscriber requested review of the Golden Butterfly (GB) portfolio, which assigns equal weights to the total stock market, small-capitalization value stocks, long-term government bonds, short-term government bonds and gold. To investigate, we use the following exchange-traded funds (ETF) as asset class proxies, respectively:

  • Vanguard Total Stock Market Index Fund (VTI)
  • iShares S&P Small-Cap 600 Value Fund (IJS)
  • iShares Barclays 20+ Year Treasury Bond (TLT)
  • iShares 1-3 Year Treasury Bond (SHY)
  • SPDR Gold Shares (GLD)

We consider either monthly or annual rebalancings to equal weight, ignoring associated trading frictions. Using monthly dividend-adjusted prices for the five ETFs during November 2004 (limited by GLD) through April 2020, we find that: Keep Reading

SACEMS at Weekly and Biweekly Frequencies

A subscriber asked for an update on whether weekly or biweekly (every two weeks) measurement of asset class momentum works better than monthly measurement as used in “Simple Asset Class ETF Momentum Strategy (SACEMS)” (SACEMS). Do higher measurement frequencies respond more efficiently to market turns? To investigate, we compare performances of strategies based on monthly, weekly and biweekly frequencies with comparable lookback intervals. For this comparison, we align weekly and biweekly results with monthly results, though they differ somewhat due to mismatches between ends of weeks and ends of months. We consider portfolios of past ETF winners based on Top 1 and on equally weighted (EW) Top 2 and Top 3. Using weekly dividend-adjusted closing prices for the asset class proxies per baseline SACEMS and the yield for Cash during February 2006  through April 2020, we find that: Keep Reading

Multi-strategy Portfolio Design Approach

How should investors think about combining strategies into a broader portfolio that reliably exploits their interactions over time? In the March 2020 version of his paper entitled “Preferred Portfolios: An Improved Blueprint to Construct Multi Strategy Portfolios”, Lars Kestner discusses how to combine individual strategies into a portfolio that performs robustly out-of-sample base on five principles. His objective is to sift data with a systematic process, find small edges and fit them together into a reliable combination of return streams that in aggregate perform well under almost all market conditions. His process employs two sets of building blocks: (1) diverse quantitative strategies clustered into four categories; and, (2) nine asset markets/classes. Based on theoretical considerations and his experience as an investment manager, he concludes that:

Keep Reading

Federal Reserve Holdings and the U.S. Stock Market

Using quarterly data in their April 2013 preliminary paper entitled “Analyzing Federal Reserve Asset Purchases: From Whom Does the Fed Buy?” Seth Carpenter, Selva Demiralp, Jane Ihrig and Elizabeth Klee find that some categories of investors appear to sell U.S. Treasuries to the Federal Reserve and rebalance toward riskier assets (corporate bonds, commercial paper, and municipal debt). Are stocks a part of this process? To investigate, we relate weekly, monthly and quarterly U.S. stock market returns to changes in the Federal Reserve’s System Open Market Account (SOMA) holdings, comprised of U.S. Treasury bills, U.S. Treasury notes and bonds, U.S. Treasury Inflation-Protected Securities (TIP) and Mortgage-Backed Securities (MBS). The Federal Reserve reports these holdings with a small lag. Using weekly (Wednesday close) dividend-adjusted prices for SPDR S&P 500 (SPY) as a stock market proxy and total SOMA holdings during early July 2003 through mid-April 2020, we find that: Keep Reading

Review of Dual Momentum with Just Three Assets

A subscriber suggested review of “Accelerating Dual Momentum [ADM] Investing”, which allocates all funds to U.S. stocks, international (ex-U.S.) small-capitalization stocks or long-term U.S. Treasury bonds, as follows:

  1. Each month, calculate for each of the two equity assets the sum of its 1-month, 3-month and 6-month past returns.
  2. If both sums are negative, buy U.S. Treasury bonds.
  3. If both sums are not negative, buy the equity asset with the higher sum.

To investigate, we apply these rules to three exchange-traded funds (ETF):

  • SPDR S&P 500 (SPY) to represent U.S. stocks.
  • iShares MSCI EAFE Small-Cap ETF (SCZ) to represent international small stocks.
  • iShares 20+ Year Treasury Bond (TLT) to represent long-term U.S. Treasury bonds.

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

Add Position Stop-gain to SACEMS?

Does adding a position take-profit (stop-gain) rule improve the performance of the “Simple Asset Class ETF Momentum Strategy” (SACEMS) by harvesting some upside volatility? SACEMS each months picks winners from among the a set of eight asset class exchange-traded fund (ETF) proxies plus cash based on past returns over a specified interval. To investigate the value of stop-gains, we augment SACEMS with a simple rule that: (1) exits to Cash from any current winner ETF when its intra-month return rises above a specified threshold; and, (2) re-sets positions per winners at the end of the month. We focus on gross compound annual growth rate (CAGR) and gross maximum drawdown (MaxDD) as key performance statistics for the Top 1, equally weighted (EW) Top 2 and EW Top 3 portfolios of monthly winners. Using monthly total (dividend-adjusted) returns and intra-month maximum returns for the specified assets during February 2006 through March 2020, we find that: Keep Reading

Add Position Stop-loss to SACEMS?

Does adding a position stop-loss rule improve the performance of the “Simple Asset Class ETF Momentum Strategy” (SACEMS) by avoiding some downside volatility? SACEMS each months picks winners from among the a set of eight asset class exchange-traded fund (ETF) proxies plus cash based on past returns over a specified interval. To investigate the value of stop-losses, we augment SACEMS with a simple rule that: (1) exits to Cash from any current winner ETF when its intra-month return falls below a specified threshold; and, (2) re-sets positions per winners at the end of the month. We focus on gross compound annual growth rate (CAGR) and gross maximum drawdown (MaxDD) as key performance statistics for the Top 1, equally weighted (EW) Top 2 and EW Top 3 portfolios of monthly winners. Using monthly total (dividend-adjusted) returns and intra-month drawdowns for the specified assets during February 2006 through March 2020, we find that: Keep Reading

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