Strategic Allocation

Based on high return correlation with the S&P 500 Index and strong past performance of the health care sector, a subscriber suggested replacing SPDR S&P 500 ETF Trust (SPY) with iShares U.S. Healthcare ETF (IYH) in the Simple Asset Class ETF Momentum Strategy (SACEMS). To investigate, we compare performance statistics for SACEMS Top 1, equal-weighted (EW) Top 2 and EW Top 3 portfolios with either SPY or IYH. Using monthly dividend-adjusted returns for baseline SACEMS assets and IYH as available during February 2006 through October 2022, we find that: Keep Reading

A subscriber suggested implementing several Simple Asset Class ETF Momentum Strategy (SACEMS) asset class proxies with allocations consisting of one third triple-leveraged (3X) versions of the proxies and two thirds cash, thereby accruing the targeted risk asset returns plus some return on cash. Specifically:

• Whenever SPDR S&P 500 ETF Trust (SPY) is a winner, implement its portfolio position as one third Direxion Daily S&P500 Bull 3X Shares (SPXL) and two thirds cash.
• Whenever iShares Russell 2000 ETF (IWM) is a winner, implement its portfolio position as one third Direxion Daily Small Cap Bull 3X Shares (TNA) and two thirds cash.
• Whenever iShares 20+ Year Treasury Bond ETF (TLT) is a winner, implement its portfolio position as one third Direxion Daily 20+ Year Treasury Bull 3X Shares (TMF) and two thirds cash.

Other SACEMS assets are unaffected, and the approach still uses past returns for SPY, IWM and TLT to determine winners. To investigate the suggestion, we compare performance statistics for SACEMS Top 1, equal-weighted (EW) Top 2 and EW Top 3 portfolios without (Base) and with (1/3 3X) the alternative strategy. Using monthly dividend-adjusted returns for Base SACEMS assets and for SPXL, TNA and TMF as available during July 2006 through October 2022, we find that: Keep Reading

A subscriber asked whether the correlation between returns on stocks and bonds is elevated when inflation is above 5%, such that equities and fixed income offer little diversification protection. To investigate, we calculate the U.S. overall inflation rate from monthly values of the consumer price index over the prior year to find months with the inflation rate over 5%. We then compute monthly total return correlations for the following two pairs of funds when inflation is above or not above 5%:

1. Fidelity Fund (FFIDX) and Fidelity Investment Grade Bond Fund (FBNDX).
2. SPDR S&P 500 ETF Trust (SPY) and iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD).

Using monthly dividend-adjusted prices for FFIDX and FBNDX since January 1980 and for SPY and LQD since July 2002, all through September 2022, we find that:

Keep Reading

Referring to “SACEMS Top 1 Mean Reversion?”, a subscriber asked about the performance of the equal-weighted (EW) second and third ranked Simple Asset Class ETF Momentum Strategy (SACEMS) assets both as a standalone strategy and in 50-50 combination with the Simple Asset Class ETF Value Strategy (SACEVS) Best Value portfolio. This alternative portfolio (SACEMS EW 2-3) would avoid any reversion tendency of the top-ranked asset. To investigate, we compare performance statistics for SACEMS EW 2-3 to those for the baseline Top 1, EW Top 2 and EW Top 3 portfolios. We also compare performance statistics for the 50-50 SACEVS Best Value-SACEMS EW 2-3 portfolio to those for 50-50 SACEVS Best Value-SACEMS EW Top 2 and 50-50 SACEVS Best Value-SACEMS EW Top 3 portfolios. Using monthly returns for SACEMS winners and for SACEVS Best Value during July 2006 through September 2022, we find that: Keep Reading

Noting that iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD) and iShares 20+ Year Treasury Bond ETF (TLT) exhibit a moderately positive return correlation, a subscriber asked about substituting Vanguard High-Yield Corporate Fund Investor Shares (VWEHX) for LQD in the Simple Asset Class ETF Value Strategy (SACEVS) to exploit undervaluation of the credit risk premium. SACEVS seeks diversification across a small set of asset class exchanged-traded funds (ETF), plus a monthly tactical edge from potential undervaluation of three risk premiums:

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.

To investigate, we compare performances of SACEVS Best Value and SACEVS Weighted portfolios with either VWEHX or LQD as the credit risk asset. Using monthly total returns for SACEVS assets during July 2002 through September 2022, we find that:

Keep Reading

Is there a best time of the month for measuring momentum within the Simple Asset Class ETF Momentum Strategy (SACEMS)? To investigate, we compare 21 variations of baseline SACEMS by shifting the monthly return calculation cycle from 10 trading days before the end of the month (EOM) to 10 trading days after EOM. For example, an EOM+5 cycle ranks assets based on closing prices five trading days after EOM each 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 daily dividend-adjusted prices for SACEMS assets during mid-February 2006 through mid-October 2022, we find that:

Keep Reading

Does a constant real annual withdrawal rate of 4% of household savings at retirement, derived from U.S. asset return experience, really protect against financial ruin? In their September 2022 paper entitled “The Safe Withdrawal Rate: Evidence from a Broad Sample of Developed Markets”, Aizhan Anarkulova, Scott Cederburg, Michael O’Doherty and Richard Sias consider data from 38 developed countries to assess safe withdrawal rates. This sample mitigates survivorship/easy data biases of the U.S. experience by including multiple left-tail instances of trading halts, wars, hyperinflation and other extreme events. They use this data to model retirement portfolio performance via stationary block bootstrap simulation, with longevity risk incorporated from U.S. Social Security Administration mortality tables. Their base case examines joint investment-longevity outcomes for a couple retiring in 2022 at age 65 using a 60% domestic stocks-40% bonds (60-40) portfolio strategy. They also look at other fixed stocks-bonds allocations and investment strategies pursued by target-date funds. Using monthly (local) real returns for domestic stocks, international stocks, bonds and bills as available for 38 developed countries during 1890 through 2019, they find that: Keep Reading

Subscribers have questioned selecting assets with negative past returns within the “Simple Asset Class ETF Momentum Strategy” (SACEMS). Inclusion of Cash as one of the assets in the SACEMS universe of exchange-traded funds (ETF) prevents the SACEMS Top 1 portfolio from holding an asset with negative past returns. To test full dual momentum versions of SACEMS equally weighted (EW) Top 2 and EW Top 3 SACEMS portfolios, we add two more copies of Cash to the universe, thereby preventing both of them from holding assets with negative past returns. We focus on the effects of adding two copies of Cash on the holdings, compound annual growth rates (CAGR) and maximum drawdowns (MaxDD) of SACEMS EW Top 2 and EW Top 3 portfolios. Using monthly dividend adjusted closing prices for the asset class proxies and the yield for Cash during February 2006 through September 2022, we find that:

Keep Reading

Can investors beat a 60/40 stocks/bonds portfolio via a long-only momentum strategy applied to many asset class proxies? In their September 2022 paper entitled “Long-Only Multi-Asset Momentum: Searching for Absolute Returns”, Enrique Zambrano and Carlos Rizzolo explore variations of a long-only multi-asset momentum strategy. Strategy elements are:

• The asset universe is SPY, QQQ, IWM, VGK, EWJ, EEM, VNQ, DBC, DBA, GLD, LQD, HYG, TLT, SHV, IEF and Cash (or underlying indexes dovetailed with actual short fund histories). Cash, SHV and IEF are risk-off assets, and all others are risk-on assets.
• Measure momentum base on: (1) total return; (2) price relative to a simple moving average (SMA); and, (3) risk-adjusted returns that penalize assets with high return dispersion.
• Use signals for three lookback intervals for returns (3, 6 and 12 months) and three SMAs (50, 100 and 200 days). Aggregate signals from the three momentum measurements and three lookback intervals based on either an ensemble method or a scoring approach.
• For some tests, penalize (favor) assets with high (low) correlations with a portfolio of the rest of the assets using either a multiplier or a divisor.
• At the end of each month, rank the 13 risk-on assets according to aggregated-signal momentum and reform an equal-weighted portfolio of the top five assets. If any risk-on assets have negative momentum (with two ways to determine negative for the scoring approach), substitute for it the risk-off asset with highest momentum.

They focus on total strategy return over the full sample period, compound annual growth rate (CAGR), annualized standard deviation of returns (volatility), ratio of CAGR to volatility, maximum drawdown (MaxDD) and the probability of 1-year rolling returns being positive or higher than -5%. They also present performance data for the nine individual momentum measurement-lookback interval combinations. They further consider a strategy variation that limits exposure to risk-on assets based on the number of assets with negative returns (momentum breadth). Using daily prices for all assets as available from the end of December 2002 through the end of May 2022 (or daily associated index levels before respective funds are available), they find that:

Keep Reading

Referencing Eurekahedge CTA/Managed Futures Hedge Fund Index (Eurekahedge) used as a benchmark in “Are Managed Futures ETFs Working?”, a subscriber asked about adding a managed futures fund index to the Simple Asset Class ETF Momentum Strategy (SACEMS) asset universe. To investigate, we apply the methodology of  “SACEMS Portfolio-Asset Addition Testing” by adding either Eurekahedge or the SG Trend Index (SG Trend) to the base set of nine assets. We consider effects on Top 1, equal-weighted top two (EW Top 3) and EW Top 3 SACEMS portfolios. We focus on gross compound annual growth rate (CAGR) and gross maximum drawdown (MaxDD) as key performance statistics. Using monthly total returns for the base set of assets and the two managed futures fund indexes during February 2006 through August 2022, we find that: Keep Reading