Objective research to aid investing decisions

Value Investing Strategy (Strategy Overview)

Allocations for February 2024 (Final)
Cash TLT LQD SPY

Momentum Investing Strategy (Strategy Overview)

Allocations for February 2024 (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.

Why Did SACEVS Allocations Just Change So Much?

Subscribers asked why the Simple Asset Class ETF Value Strategy (SACEVS) signaled an apparently dramatic change in allocations at the end of June. SACEVS seeks a monthly tactical edge from timing three risk premiums associated with U.S. Treasury notes, corporate bonds and stocks:

  1. Term – monthly difference between the 10-year Constant Maturity U.S. Treasury note (T-note) yield and the 3-month Constant Maturity U.S. Treasury bill (T-bill) yield.
  2. Credit – monthly difference between the  Moody’s Seasoned Baa Corporate Bonds yield and the T-note yield.
  3. Equity – monthly difference between S&P 500 operating earnings yield and the T-note yield.

At the end of each month, the Best Value version of SACEVS picks the most undervalued premium (if any). The Weighted version of SACEVS weights all undervalued premiums (if any) according to degree of undervaluation. Using monthly SACEVS inputs during March 1989 through June 2023, we find that: Keep Reading

SACEMS Optimal Lookback Interval Stability

A subscriber asked about the stability of the momentum measurement (lookback) interval used for strategies like the Simple Asset Class ETF Momentum Strategy (SACEMS). To investigate, we run two tests on each of top one (Top 1),  equal-weighted top two (EW Top 2) and equal-weighted top three (EW Top 3) versions of SACEMS:

  1. Identify the SACEMS lookback interval with the highest gross compound annual growth rate (CAGR) for a sample starting February 2006 when Invesco DB Commodity Index Tracking Fund (DBC) becomes available and ending each of May 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020, 2021, 2022 and 2023. We consider lookback intervals of one to 12 months, meaning that earliest allocations are for February 2007 to accommodate the longest interval. The shortest sample period is therefore 5.3 years. This test takes the perspective of an investor who devises SACEMS in May 2012 and each year adds 12 months of data and checks whether the optimal lookback interval has changed.
  2. Identify the SACEMS lookback interval with the highest gross CAGR for a sample ending May 2021 and starting each of February 2006, 2007, 2008, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017 and 2018. The shortest sample period is again 5.3 years. This test takes perspectives of different investors who devise SACEMS at the end of February in different years.

Using monthly SACEMS inputs and the SACEMS model as currently specified for February 2006 through May 2023, we find that: Keep Reading

Performance of non-U.S. 60-40

A subscriber asked about the performance of a strategy that each month rebalances to 60% international equities and 40% international corporate bonds (both non-U.S.), and how this performance compares to that of a portfolio that each month allocates 50% to Simple Asset Class ETF Value Strategy (SACEVS) Best Value and 50% to Simple Asset Class ETF Momentum Strategy (SACEMS) equal-weighted (EW) Top 2. To investigate, we use:

We begin the test at the end of May 2010, limited by IBND inception. We ignore monthly rebalancing frictions for both strategies. Using monthly dividend-adjusted prices for ACWX and IBND starting May 2010 and monthly gross returns for SACEVS Best Value-SACEMS EW Top 2 50-50 starting June 2010, all through May 2023, we find that: Keep Reading

Alternative Simplest Asset Class Momentum Strategies

In response to “Tech Premium Boost for Simplest Asset Class Momentum Strategy?”, a subscriber asked about testing the combination of Vanguard Growth Index Fund (VUG) and Vanguard Total Bond Market Index Fund (BND) in the “Simplest Asset Class ETF Momentum Strategy?”, which each month holds SPDR S&P 500 (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 and TLT (SPY-TLT), the strategy executed with Invesco QQQ Trust (QQQ) and TLT (QQQ-TLT) and the requested alternative (VUG-BND). 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, VUG, TLT and BND during April 2007 (limited by BND) through May 2023, we find that:

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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 May 2023, we find that: Keep Reading

Very Simple Asset Class ETF Momentum Strategy (VSACEMS)

A subscriber requested evaluation of a streamlined version of the Simple Asset Class ETF Momentum Strategy (SACEMS) that considers only three exchange-traded funds (ETF):

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 call the strategy Very Simple SACEMS (VSACEMS) Top 1. 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 July 2002 (limited by TLT and LQD) through May 2023, we find that: Keep Reading

Finding Alternative Investments Resistant to Stock and Bond Crashes

Which alternative risk premiums (ARP) protect against stock and bond market crashes via return correlations/betas that remain low during such events? In their May 2023 paper entitled “Does Alternative Risk Premia Diversify? New Evidence for the Post-Pandemic Era”, Antti Suhonen and Kari Vatanen employ recent data to re-examine ARP risk and diversification properties, focusing on drawdown intervals for stocks and bonds. They categorize ARP strategies as offensive (risk-on) or defensive (risk-off) based on respective equity market interactions. For robustness, they consider several drawdown metrics. Using weekly data for 27 “pure” factors spanning five asset classes (commodity, credit, equity, fixed income and currency exchange) and 10 ARP strategies (backwardation, carry, congestion, low volatility, momentum, quality, size, trend, value and volatility) from PremiaLab during January 2007 through mid-October 2022, they find that:

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A Few Notes on The Uncertainty Solution

In his 2023 book, The Uncertainty Solution: How to Invest with Confidence in the Face of the Unknown, author John Jennings seeks “to provide individual investors with mental models that will help them make better investment decisions, practice better investment behavior, and be better consumers of investment advice… This book is not about how to invest but rather how to think about investing. It is the culmination of my thirteen-year quest for investment wisdom… The mental models in this book describe the investment world as full of uncertainty, wild randomness, unpredictability, and pitfalls. There’s no easy path. But mental models that embrace reality—that take the world as it is, not how we think it is or want it to be—will make you a better investor and a better consumer of investment advice.” Based on his many years of wealth management experience, especially during the 2007-2008 Financial Crisis, he concludes that:

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Combine “Sell in May” and SACEVS-SACEMS?

A subscriber asked about the performance of the 50-50  Simple Asset Class ETF Value Strategy (SACEVS) Best Value-Simple Asset Class ETF Momentum Strategy (SACEMS) Equal-Weighted (EW) Top 2 in combination with “Sell in May”. To investigate, we compare three alternatives:

  1. Best Value – EW Top 2 – holds 50-50 SACEVS Best Value-SACEMS EW Top 2 during all months.
  2. “Sell in May” – holds 50-50 SACEVS Best Value-SACEMS EW Top 2 during November through April and 3-month U.S. Treasury bills (T-bills) during May through October.
  3. “Opposite” – holds 50-50 SACEVS Best Value-SACEMS EW Top 2 during May through October and 3-month U.S. Treasury bills (T-bills) during November through April.

Using monthly returns for SACEVS Best Value and SACEMS EW Top 2 and monthly T-bill yield during July 2006 (limited by SACEMS) through April 2023, we find that: Keep Reading

Update of a Lumber/Gold Risk-on/Risk-off Strategy

A subscriber asked for an update of the 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:

Using weekly dividend-adjusted prices for SPY, TLT, CUT and GLD during early February 2008 (limited by inception of CUT) through April 2023 and roughly matched start and stop performance for monthly SACEVS-SACEMS 50-50 , we find that:

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