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.

Expanded/Modified SACEMS Asset Universe?

A subscriber suggested expanding and modifying the asset universe for the Simple Asset Class ETF Momentum Strategy (SACEMS) to consist of the following exchange-traded funds (ETF):

  • SPDR Portfolio S&P 500 Growth (SPYG)
  • SPDR Portfolio S&P 500 Value (SPYV)
  • iShares Russell 2000 Growth (IWO)
  • iShares Russell 2000 Value (IWN)
  • Invesco QQQ Trust (QQQ)
  • iShares MSCI EAFE Index (EFA)
  • iShares MSCI Emerging Markets Index (EEM)
  • iShares Barclays 20+ Year Treasury Bond (TLT)
  • iShares Core U.S. Aggregate Bond (AGG)
  • iShares U.S. Real Estate ETF (IYR)
  • SPDR Gold Shares (GLD)
  • Invesco DB Commodity Index Tracking (DBC)
  • 3-month Treasury bills (Cash)

To investigate attractiveness of this alternative, we first look at compound annual growth rates (CAGR) and maximum drawdowns (MaxDD) for the expanded universe across SACEMS momentum measurement (lookback) intervals ranging from 1 to 12 months to identify effective lookback intervals. We then compare annual performance statistics of the Top 1, equal-weighted (EW) Top 2, EW Top 3 and EW Top 4 portfolios for the expanded and baseline asset universes with the SACEMS baseline lookback interval. Using monthly dividend-adjusted returns for the expanded asset universe during February 2006 (limited by DBC) through December 2021 and monthly returns for baseline SACEMS over the same period, we find that: Keep Reading

Optimal SACEMS Lookback Interval Update

How sensitive is performance of the “Simple Asset Class ETF Momentum Strategy” (SACEMS) to choice of momentum calculation lookback interval, and what interval works best? To investigate, we generate gross compound annual growth rates (CAGR) and maximum drawdowns (MaxDD) for SACEMS Top 1, equally weighted (EW) EW Top 2 and EW Top 3 portfolios over lookback intervals ranging from one to 12 months. All calculations start at the end of February 2007 based on inception of the commodities exchange-traded fund and the longest lookback interval. Using end-of-month total (dividend-adjusted) returns for the SACEMS asset universe during February 2006 through December 2021, we find that: Keep Reading

Testing the All Weather Portfolio

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:

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 2021, we find that: Keep Reading

Substitute VIG for SPY in SACEVS and SACEMS?

A subscriber asked whether substituting the less volatile Vanguard Dividend Appreciation Index Fund (VIG) for SPDR S&P 500 (SPY) in the Simple Asset Class ETF Value Strategy (SACEVS) and the Simple Asset Class ETF Momentum Strategy (SACEMS) would improve outcomes. To investigate, we substitute monthly VIG dividend-adjusted returns for SPY dividend-adjusted returns in the two model strategies. Because VIG is not available for the entire sample periods used in the tracked models, we splice VIG returns into the SPY position starting with inception of the former in May 2006. We then compare the spliced performance with the original baseline performance, including: gross compound annual growth rates (CAGR), gross annual returns, average gross annual returns, standard deviations of gross annual returns, gross annual Sharpe ratios and maximum drawdowns (MaxDD). In Sharpe ratio calculations, we employ the average monthly yield on 3-month U.S. Treasury bills during a year as the risk-free rate for that year. Using the specified methodology and data to generate SACEVS monthly returns starting August 2002 and SACEMS monthly returns starting July 2006, all through December 2021, we find that:

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Testing SACEMS with Different Bull-Bear Lookback Intervals

Referring to “Asset Class Momentum Faster During Bear Markets?”, a subscriber asked about performance of a modification of the equal-weighted top three (EW Top 3) version of the “Simple Asset Class ETF Momentum Strategy” (SACEMS) which uses the baseline momentum ranking (lookback) interval when the S&P 500 Index is above its 10-month simple moving average (SMA10) and a shorter lookback interval when the index is below its SMA10. To investigate, we look at average monthly return, standard deviation of monthly returns, monthly reward/risk (average divided by standard deviation), compound annual growth rate (CAGR) and maximum drawdown (MaxDD) as key performance statistics. Using monthly SACEMS returns for different lookback intervals since July 2006 and monthly levels of the S&P 500 Index since September 2005, all through December 2021, we find that: Keep Reading

Interest Rate Changes Exploitable for Sector Rotation?

A subscriber asked about a strategy that rotates among equity sectors according to changes in interests rate as set by Federal Reserve Bank monetary policy. To investigate, we consider the following nine sector Standard & Poor’s Depository Receipts (SPDR) exchange-traded funds (ETF):

Materials Select Sector SPDR (XLB)
Energy Select Sector SPDR (XLE)
Financial Select Sector SPDR (XLF)
Industrial Select Sector SPDR (XLI)
Technology Select Sector SPDR (XLK)
Consumer Staples Select Sector SPDR (XLP)
Utilities Select Sector SPDR (XLU)
Health Care Select Sector SPDR (XLV)
Consumer Discretionary Select SPDR (XLY)

We use monthly effective federal funds rate (EFFR) as the interest rate. We consider two EFFR-based variables: (1) monthly change in EFFR; and, (2) 3-month slope of EFFR for signal smoothing. For each variable and each sector ETF, we consider two tests: (1) correlation of the variable with ETF return each of the next three months; and, (2) average next-month ETF returns across ranked fifths (quintiles) of the EFFR variable. The first test looks for linear relationships, and the second test looks for non-linear relationships. Measurements are at month ends, with a 1-day delay for ETF return calculations to ensure availability of EFFR data. Using monthly levels of EFFR since September 1998 and dividend-adjusted monthly levels of the above sector ETFs and of SPDR S&P 500 (SPY) since December 1998 (limited by sector ETFs), all through November 2021, we find that: Keep Reading

Leading Economic Index Exploitable for Sector Rotation?

A subscriber asked about a strategy that rotates among equity sectors according to the Leading Economic Index (LEI), published monthly by the Conference Board (see “Leading Economic Index and the Stock Market”). To assess LEI usefulness for sector rotation, we consider the following nine sector Standard & Poor’s Depository Receipts (SPDR) exchange-traded funds (ETF):

Materials Select Sector SPDR (XLB)
Energy Select Sector SPDR (XLE)
Financial Select Sector SPDR (XLF)
Industrial Select Sector SPDR (XLI)
Technology Select Sector SPDR (XLK)
Consumer Staples Select Sector SPDR (XLP)
Utilities Select Sector SPDR (XLU)
Health Care Select Sector SPDR (XLV)
Consumer Discretionary Select SPDR (XLY)

We consider two LEI-based variables: (1) monthly change in LEI; and, (2) 3-month average change in LEI (average of current value, revised value for prior month and twice-revised value for two months ago) for signal smoothing. For each variable and each sector ETF, we consider two tests: (1) correlation of the variable with ETF return each of the next three months; and, (2) average next-month ETF returns across ranked fifths (quintiles) of the LEI variable. The first test looks for linear relationships, and the second test looks for non-linear relationships. Monthly measurements employ closes on LEI release dates, generally after the market open about three weeks after ends of calendar months reported. Using monthly changes in LEI from archived Conference Board press releases and contemporaneous dividend-adjusted daily levels of the above sector ETFs and of SPDR S&P 500 (SPY) from mid-July 2002 (limited by LEI press releases) through mid-November 2021 (233 monthly LEI observations), we find that: Keep Reading

Add REITs to SACEVS?

What happens if we extend the “Simple Asset Class ETF Value Strategy” (SACEVS) with a real estate risk premium, derived from the yield on equity Real Estate Investment Trusts (REIT), represented by the FTSE NAREIT Equity REITs Index? To investigate, we apply the SACEVS methodology to the following asset class exchange-traded funds (ETF), plus cash:

3-month Treasury bills (Cash)
iShares 20+ Year Treasury Bond (TLT)
iShares iBoxx $ Investment Grade Corporate Bond (LQD)
SPDR Dow Jones REIT (RWR) through September 2004 dovetailed with Vanguard REIT ETF (VNQ) thereafter
SPDR S&P 500 (SPY)

This set of ETFs relates to four risk premiums, as specified below: (1) term; (2) credit (default); (3) real estate; and, (4) equity. We focus on effects of adding the real estate risk premium on gross compound annual growth rates (CAGR), maximum drawdowns (MaxDD) and annual Sharpe ratios of the Best Value (picking the most undervalued premium) and Weighted (weighting all undervalued premiums according to degree of undervaluation) versions of SACEVS. Using lagged quarterly S&P 500 earnings, monthly S&P 500 Index levels and monthly yields for 3-month U.S. Treasury bill (T-bill), the 10-year Constant Maturity U.S. Treasury note (T-note), Moody’s Seasoned Baa Corporate Bonds and FTSE NAREIT Equity REITs Index since March 1989 (limited by availability of earnings data), and monthly dividend-adjusted closing prices for the above asset class ETFs since July 2002, all through November 2021, we find that: Keep Reading

More International Equity Market Granularity for SACEMS?

A subscriber asked whether more granularity in international equity choices for the “Simple Asset Class ETF Momentum Strategy” (SACEMS), such as considered by Decision Moose, would improve performance. To investigate, we augment/replace international developed and emerging equity market exchange-traded funds (ETF) such that the universe of assets becomes:

  • SPDR S&P 500 (SPY)
  • iShares Russell 2000 Index (IWM)
  • iShares Europe (IEV)
  • iShares MSCI Japan (EWJ)
  • iShares MSCI Pacific ex Japan (EPP)
  • iShares MSCI Emerging Markets Index (EEM)
  • iShares JPMorgan Emerging Markets Bond Fund (EMB)
  • iShares Latin America 40 (ILF)
  • iShares Barclays 20+ Year Treasury Bond (TLT)
  • Vanguard REIT ETF (VNQ)
  • SPDR Gold Shares (GLD)
  • PowerShares DB Commodity Index Tracking (DBC)
  • 3-month Treasury bills (Cash)

We compare original (SACEMS Base) and modified (SACEMS Granular), each month picking winners from their respective sets of ETFs based on total returns over a fixed lookback interval. We focus on gross compound annual growth rate (CAGR), gross maximum drawdown (MaxDD) and gross annual Sharpe ratio (average annual excess return divided by standard deviation of annual excess returns, using average monthly T-bill yield during a year to calculate excess returns) as key performance statistics for the Top 1, equally weighted (EW) Top 2 and EW Top 3 portfolios of monthly winners. Using daily and monthly total (dividend-adjusted) returns for the specified assets during February 2006 through October 2021, we find that: Keep Reading

SACEVS with Quarterly Allocation Updates

Do quarterly allocation updates for the Best Value and Weighted versions of the “Simple Asset Class ETF Value Strategy” (SACEVS) work as well as monthly updates? These strategies allocate funds to the following asset class exchange-traded funds (ETF) according to valuations of term, credit and equity risk premiums, or to cash if no premiums are undervalued:

3-month Treasury bills (Cash)
iShares 20+ Year Treasury Bond (TLT)
iShares iBoxx $ Investment Grade Corporate Bond (LQD)
SPDR S&P 500 (SPY)

Changing from monthly to quarterly allocation updates does not sacrifice information about lagged quarterly S&P 500 Index earnings, but it does sacrifice currency of term and credit premiums. To assess alternatives, we compare cumulative performances and the following key metrics for quarterly and monthly allocation updates: gross compound annual growth rate (CAGR), gross maximum drawdown (MaxDD), annual gross returns and volatilities and annual gross Sharpe ratios. Using monthly dividend-adjusted closes for the above ETFs during September 2002 (earliest alignment of months and quarters) through September 2021, we find that:

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