Description of US Market Strategy

The U.S. Market Strategy was designed as an alternative to our Universal Investment Strategy which allocates between SPY (S&P 500 ETF) and TLT (U.S. Treasuries ETF). The equity component of this new strategy switches between SPY (S&P500), QQQ (Nasdaq 100), DIA (Dow 30) and SPLV (S&P 500 low volatility) so it can take advantage of different market conditions. The addition of SPLV provides a good defensive option in times of high market volatility. 

In addition to U.S. equities, the strategy utilizes a hedge strategy that switches between TLT, TIP, UUP and GLD.

The strategy's backtests performed substantially better than a simple SPY-TLT investment. All of the component ETFs are very liquid with small spreads making them easy to trade with negligible costs. 

 

Statistics of US Market Strategy (YTD)

What do these metrics mean? [Read More] [Hide]

TotalReturn:

'Total return, when measuring performance, is the actual rate of return of an investment or a pool of investments over a given evaluation period. Total return includes interest, capital gains, dividends and distributions realized over a given period of time. Total return accounts for two categories of return: income including interest paid by fixed-income investments, distributions or dividends and capital appreciation, representing the change in the market price of an asset.'

Applying this definition to our asset in some examples:
  • Looking at the total return, or increase in value of 101.2% in the last 5 years of US Market Strategy, we see it is relatively higher, thus better in comparison to the benchmark DIA (80.8%)
  • During the last 3 years, the total return is 44.8%, which is smaller, thus worse than the value of 58.1% from the benchmark.

CAGR:

'The compound annual growth rate isn't a true return rate, but rather a representational figure. It is essentially a number that describes the rate at which an investment would have grown if it had grown the same rate every year and the profits were reinvested at the end of each year. In reality, this sort of performance is unlikely. However, CAGR can be used to smooth returns so that they may be more easily understood when compared to alternative investments.'

Using this definition on our asset we see for example:
  • Looking at the annual performance (CAGR) of 15% in the last 5 years of US Market Strategy, we see it is relatively higher, thus better in comparison to the benchmark DIA (12.6%)
  • Looking at compounded annual growth rate (CAGR) in of 13.2% in the period of the last 3 years, we see it is relatively lower, thus worse in comparison to DIA (16.5%).

Volatility:

'In finance, volatility (symbol σ) is the degree of variation of a trading price series over time as measured by the standard deviation of logarithmic returns. Historic volatility measures a time series of past market prices. Implied volatility looks forward in time, being derived from the market price of a market-traded derivative (in particular, an option). Commonly, the higher the volatility, the riskier the security.'

Using this definition on our asset we see for example:
  • Compared with the benchmark DIA (13.3%) in the period of the last 5 years, the volatility of 6.7% of US Market Strategy is smaller, thus better.
  • During the last 3 years, the volatility is 6.1%, which is lower, thus better than the value of 12.8% from the benchmark.

DownVol:

'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.'

Which means for our asset as example:
  • Compared with the benchmark DIA (14.7%) in the period of the last 5 years, the downside risk of 7.4% of US Market Strategy is lower, thus better.
  • Looking at downside risk in of 6.9% in the period of the last 3 years, we see it is relatively lower, thus better in comparison to DIA (14.4%).

Sharpe:

'The Sharpe ratio was developed by Nobel laureate William F. Sharpe, and is used to help investors understand the return of an investment compared to its risk. The ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk. Subtracting the risk-free rate from the mean return allows an investor to better isolate the profits associated with risk-taking activities. One intuition of this calculation is that a portfolio engaging in 'zero risk' investments, such as the purchase of U.S. Treasury bills (for which the expected return is the risk-free rate), has a Sharpe ratio of exactly zero. Generally, the greater the value of the Sharpe ratio, the more attractive the risk-adjusted return.'

Applying this definition to our asset in some examples:
  • The Sharpe Ratio over 5 years of US Market Strategy is 1.86, which is larger, thus better compared to the benchmark DIA (0.76) in the same period.
  • Looking at risk / return profile (Sharpe) in of 1.75 in the period of the last 3 years, we see it is relatively greater, thus better in comparison to DIA (1.1).

Sortino:

'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:
  • Compared with the benchmark DIA (0.69) in the period of the last 5 years, the excess return divided by the downside deviation of 1.7 of US Market Strategy is larger, thus better.
  • During the last 3 years, the excess return divided by the downside deviation is 1.54, which is larger, thus better than the value of 0.98 from the benchmark.

Ulcer:

'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:
  • Compared with the benchmark DIA (4.21 ) in the period of the last 5 years, the Ulcer Index of 1.4 of US Market Strategy is lower, thus worse.
  • Compared with DIA (4.13 ) in the period of the last 3 years, the Ulcer Ratio of 1.28 is lower, thus worse.

MaxDD:

'A maximum drawdown is the maximum loss from a peak to a trough of a portfolio, before a new peak is attained. Maximum Drawdown is an indicator of downside risk over a specified time period. It can be used both as a stand-alone measure or as an input into other metrics such as 'Return over Maximum Drawdown' and the Calmar Ratio. Maximum Drawdown is expressed in percentage terms.'

Applying this definition to our asset in some examples:
  • Compared with the benchmark DIA (-18.1 days) in the period of the last 5 years, the maximum DrawDown of -4.6 days of US Market Strategy is larger, thus better.
  • During the last 3 years, the maximum reduction from previous high is -4.6 days, which is higher, thus better than the value of -18.1 days from the benchmark.

MaxDuration:

'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 time in days below previous high water mark over 5 years of US Market Strategy is 132 days, which is lower, thus better compared to the benchmark DIA (227 days) in the same period.
  • Looking at maximum time in days below previous high water mark in of 93 days in the period of the last 3 years, we see it is relatively lower, thus better in comparison to DIA (161 days).

AveDuration:

'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.'

Using this definition on our asset we see for example:
  • Compared with the benchmark DIA (53 days) in the period of the last 5 years, the average days under water of 25 days of US Market Strategy is lower, thus better.
  • Compared with DIA (43 days) in the period of the last 3 years, the average time in days below previous high water mark of 22 days is lower, thus better.

Performance of US Market Strategy (YTD)

Historical returns have been extended using synthetic data.

Allocations of US Market Strategy
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Allocations

Returns of US Market Strategy (%)

  • "Year" returns in the table above are not equal to the sum of monthly returns due to compounding.
  • Performance results of US Market 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.