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.

'The total return on a portfolio of investments takes into account not only the capital appreciation on the portfolio, but also the income received on the portfolio. The income typically consists of interest, dividends, and securities lending fees. This contrasts with the price return, which takes into account only the capital gain on an investment.'

Which means for our asset as example:- Compared with the benchmark AGG (22.6%) in the period of the last 5 years, the total return, or performance of 38.7% of Bond ETF Rotation Strategy is larger, thus better.
- During the last 3 years, the total return, or increase in value is 11.7%, which is lower, thus worse than the value of 16.4% from the benchmark.

'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.'

Which means for our asset as example:- Looking at the annual performance (CAGR) of 6.8% in the last 5 years of Bond ETF Rotation Strategy, we see it is relatively greater, thus better in comparison to the benchmark AGG (4.2%)
- During the last 3 years, the annual performance (CAGR) is 3.8%, which is lower, thus worse than the value of 5.2% from the benchmark.

'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.'

Which means for our asset as example:- The 30 days standard deviation over 5 years of Bond ETF Rotation Strategy is 5.6%, which is higher, thus worse compared to the benchmark AGG (4.6%) in the same period.
- Looking at volatility in of 6.1% in the period of the last 3 years, we see it is relatively larger, thus worse in comparison to AGG (5.4%).

'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.'

Applying this definition to our asset in some examples:- The downside deviation over 5 years of Bond ETF Rotation Strategy is 4.1%, which is larger, thus worse compared to the benchmark AGG (3.5%) in the same period.
- During the last 3 years, the downside deviation is 4.6%, which is greater, thus worse than the value of 4.1% from the benchmark.

'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.'

Which means for our asset as example:- Compared with the benchmark AGG (0.36) in the period of the last 5 years, the Sharpe Ratio of 0.77 of Bond ETF Rotation Strategy is greater, thus better.
- During the last 3 years, the ratio of return and volatility (Sharpe) is 0.21, which is lower, thus worse than the value of 0.5 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:- The downside risk / excess return profile over 5 years of Bond ETF Rotation Strategy is 1.05, which is greater, thus better compared to the benchmark AGG (0.48) in the same period.
- Looking at excess return divided by the downside deviation in of 0.28 in the period of the last 3 years, we see it is relatively lower, thus worse in comparison to AGG (0.65).

'Ulcer Index is a method for measuring investment risk that addresses the real concerns of investors, unlike the widely used standard deviation of return. UI is a measure of the depth and duration of drawdowns in prices from earlier highs. Using Ulcer Index instead of standard deviation can lead to very different conclusions about investment risk and risk-adjusted return, especially when evaluating strategies that seek to avoid major declines in portfolio value (market timing, dynamic asset allocation, hedge funds, etc.). The Ulcer Index was originally developed in 1987. Since then, it has been widely recognized and adopted by the investment community. According to Nelson Freeburg, editor of Formula Research, Ulcer Index is “perhaps the most fully realized statistical portrait of risk there is.'

Which means for our asset as example:- The Downside risk index over 5 years of Bond ETF Rotation Strategy is 2.05 , which is higher, thus worse compared to the benchmark AGG (1.62 ) in the same period.
- During the last 3 years, the Ulcer Index is 2.46 , which is larger, thus worse than the value of 1.4 from the benchmark.

'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.'

Using this definition on our asset we see for example:- Compared with the benchmark AGG (-9.6 days) in the period of the last 5 years, the maximum reduction from previous high of -12.8 days of Bond ETF Rotation Strategy is smaller, thus worse.
- Compared with AGG (-9.6 days) in the period of the last 3 years, the maximum drop from peak to valley of -12.8 days is lower, thus worse.

'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:- Compared with the benchmark AGG (331 days) in the period of the last 5 years, the maximum days under water of 154 days of Bond ETF Rotation Strategy is lower, thus better.
- During the last 3 years, the maximum time in days below previous high water mark is 154 days, which is smaller, thus better than the value of 259 days from the benchmark.

'The Average 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. 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 AGG (94 days) in the period of the last 5 years, the average time in days below previous high water mark of 38 days of Bond ETF Rotation Strategy is smaller, thus better.
- Compared with AGG (62 days) in the period of the last 3 years, the average days below previous high of 48 days is lower, thus better.

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.