The Bond Rotation Strategy is one of our core investment strategies. It is appropriate for investors looking to collect bond dividends while pursuing growth by rotating between bond sectors. The strategy evaluates and allocates to the best performing bond ETFs including treasuries, TIPS, foreign, high-yield and convertible bonds. This is a good strategy if you are looking for a long-term bond investment with medium risk.

The strategy has been updated (as of May 1st, 2020) to allocate 40%-60% to our HEDGE sub-strategy. The statistics below reflect the updated model.

'Total return is the amount of value an investor earns from a security over a specific period, typically one year, when all distributions are reinvested. Total return is expressed as a percentage of the amount invested. For example, a total return of 20% means the security increased by 20% of its original value due to a price increase, distribution of dividends (if a stock), coupons (if a bond) or capital gains (if a fund). Total return is a strong measure of an investment’s overall performance.'

Using this definition on our asset we see for example:- The total return, or increase in value over 5 years of Bond ETF Rotation Strategy is 52.1%, which is larger, thus better compared to the benchmark AGG (5.3%) in the same period.
- Compared with AGG (-6.6%) in the period of the last 3 years, the total return, or performance of 31% is larger, thus better.

'Compound annual growth rate (CAGR) is a business and investing specific term for the geometric progression ratio that provides a constant rate of return over the time period. CAGR is not an accounting term, but it is often used to describe some element of the business, for example revenue, units delivered, registered users, etc. CAGR dampens the effect of volatility of periodic returns that can render arithmetic means irrelevant. It is particularly useful to compare growth rates from various data sets of common domain such as revenue growth of companies in the same industry.'

Which means for our asset as example:- Compared with the benchmark AGG (1%) in the period of the last 5 years, the annual return (CAGR) of 8.8% of Bond ETF Rotation Strategy is higher, thus better.
- During the last 3 years, the annual performance (CAGR) is 9.4%, which is larger, thus better than the value of -2.2% from the benchmark.

'Volatility is a rate at which the price of a security increases or decreases for a given set of returns. Volatility is measured by calculating the standard deviation of the annualized returns over a given period of time. It shows the range to which the price of a security may increase or decrease. Volatility measures the risk of a security. It is used in option pricing formula to gauge the fluctuations in the returns of the underlying assets. Volatility indicates the pricing behavior of the security and helps estimate the fluctuations that may happen in a short period of time.'

Applying this definition to our asset in some examples:- The 30 days standard deviation over 5 years of Bond ETF Rotation Strategy is 8.6%, which is larger, thus worse compared to the benchmark AGG (5.8%) in the same period.
- Looking at volatility in of 10% in the period of the last 3 years, we see it is relatively higher, thus worse in comparison to AGG (7.1%).

'Downside risk is the financial risk associated with losses. That is, it is the risk of the actual return being below the expected return, or the uncertainty about the magnitude of that difference. Risk measures typically quantify the downside risk, whereas the standard deviation (an example of a deviation risk measure) measures both the upside and downside risk. Specifically, downside risk in our definition is the semi-deviation, that is the standard deviation of all negative returns.'

Using this definition on our asset we see for example:- The downside deviation over 5 years of Bond ETF Rotation Strategy is 6.4%, which is larger, thus worse compared to the benchmark AGG (4.4%) in the same period.
- Compared with AGG (5.4%) in the period of the last 3 years, the downside deviation of 7.5% is larger, thus worse.

'The Sharpe ratio is the measure of risk-adjusted return of a financial portfolio. Sharpe ratio is a measure of excess portfolio return over the risk-free rate relative to its standard deviation. Normally, the 90-day Treasury bill rate is taken as the proxy for risk-free rate. A portfolio with a higher Sharpe ratio is considered superior relative to its peers. The measure was named after William F Sharpe, a Nobel laureate and professor of finance, emeritus at Stanford University.'

Using this definition on our asset we see for example:- The Sharpe Ratio over 5 years of Bond ETF Rotation Strategy is 0.73, which is larger, thus better compared to the benchmark AGG (-0.25) in the same period.
- During the last 3 years, the risk / return profile (Sharpe) is 0.69, which is higher, thus better than the value of -0.67 from the benchmark.

'The Sortino ratio measures the risk-adjusted return of an investment asset, portfolio, or strategy. It is a modification of the Sharpe ratio but penalizes only those returns falling below a user-specified target or required rate of return, while the Sharpe ratio penalizes both upside and downside volatility equally. Though both ratios measure an investment's risk-adjusted return, they do so in significantly different ways that will frequently lead to differing conclusions as to the true nature of the investment's return-generating efficiency. The Sortino ratio is used as a way to compare the risk-adjusted performance of programs with differing risk and return profiles. In general, risk-adjusted returns seek to normalize the risk across programs and then see which has the higher return unit per risk.'

Using this definition on our asset we see for example:- Looking at the excess return divided by the downside deviation of 0.97 in the last 5 years of Bond ETF Rotation Strategy, we see it is relatively greater, thus better in comparison to the benchmark AGG (-0.34)
- Compared with AGG (-0.88) in the period of the last 3 years, the excess return divided by the downside deviation of 0.92 is larger, thus better.

'The ulcer index is a stock market risk measure or technical analysis indicator devised by Peter Martin in 1987, and published by him and Byron McCann in their 1989 book The Investors Guide to Fidelity Funds. It's designed as a measure of volatility, but only volatility in the downward direction, i.e. the amount of drawdown or retracement occurring over a period. Other volatility measures like standard deviation treat up and down movement equally, but a trader doesn't mind upward movement, it's the downside that causes stress and stomach ulcers that the index's name suggests.'

Applying this definition to our asset in some examples:- The Downside risk index over 5 years of Bond ETF Rotation Strategy is 2.91 , which is smaller, thus better compared to the benchmark AGG (5.71 ) in the same period.
- Looking at Ulcer Ratio in of 3.4 in the period of the last 3 years, we see it is relatively lower, thus better in comparison to AGG (7.34 ).

'Maximum drawdown is defined as the peak-to-trough decline of an investment during a specific period. It is usually quoted as a percentage of the peak value. The maximum drawdown can be calculated based on absolute returns, in order to identify strategies that suffer less during market downturns, such as low-volatility strategies. However, the maximum drawdown can also be calculated based on returns relative to a benchmark index, for identifying strategies that show steady outperformance over time.'

Applying this definition to our asset in some examples:- The maximum DrawDown over 5 years of Bond ETF Rotation Strategy is -21.4 days, which is lower, thus worse compared to the benchmark AGG (-18.4 days) in the same period.
- Looking at maximum reduction from previous high in of -21.4 days in the period of the last 3 years, we see it is relatively smaller, thus worse in comparison to AGG (-18.4 days).

'The Maximum Drawdown Duration is an extension of the Maximum Drawdown. However, this metric does not explain the drawdown in dollars or percentages, rather in days, weeks, or months. It is the length of time the account was in the Max Drawdown. A Max Drawdown measures a retrenchment from when an equity curve reaches a new high. It’s the maximum an account lost during that retrenchment. This method is applied because a valley can’t be measured until a new high occurs. Once the new high is reached, the percentage change from the old high to the bottom of the largest trough is recorded.'

Which means for our asset as example:- The maximum days under water over 5 years of Bond ETF Rotation Strategy is 217 days, which is lower, thus better compared to the benchmark AGG (628 days) in the same period.
- During the last 3 years, the maximum days below previous high is 217 days, which is lower, thus better than the value of 628 days from the benchmark.

'The Drawdown Duration is the length of any peak to peak period, or the time between new equity highs. The Avg Drawdown Duration is the average amount of time an investment has seen between peaks (equity highs), or in other terms the average of time under water of all drawdowns. So in contrast to the Maximum duration it does not measure only one drawdown event but calculates the average of all.'

Which means for our asset as example:- Compared with the benchmark AGG (185 days) in the period of the last 5 years, the average time in days below previous high water mark of 62 days of Bond ETF Rotation Strategy is lower, thus better.
- Looking at average days under water in of 72 days in the period of the last 3 years, we see it is relatively lower, thus better in comparison to AGG (276 days).

Historical returns have been extended using synthetic data.
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- Note that yearly returns do not equal the sum of monthly returns due to compounding.
- Performance results of Bond ETF Rotation Strategy are hypothetical, do not account for slippage, fees or taxes, and are based on backtesting, which has many inherent limitations, some of which are described in our Terms of Use.