Description

The Short Term Bond Strategy is essentially a place to park cash that earns interest. When combined with other higher risk strategies it creates a lower risk portfolio and generally improves the portfolio's Sharpe ratio. If your broker pays interest on cash balances that is comparable to the current yield of this strategy, you can choose to keep this allocation in cash instead.

Methodology & Assets

This strategy switches between very low risk ETFs that hold short term corporate or treasury bonds including GSY, MINT and NEAR.

Statistics (YTD)

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

TotalReturn:

'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:
  • The total return, or increase in value over 5 years of Short Term Bond Strategy is 9.2%, which is smaller, thus worse compared to the benchmark TLT (50.7%) in the same period.
  • Looking at total return, or performance in of 6.1% in the period of the last 3 years, we see it is relatively lower, thus worse in comparison to TLT (39.9%).

CAGR:

'The compound annual growth rate (CAGR) is a useful measure of growth over multiple time periods. It can be thought of as the growth rate that gets you from the initial investment value to the ending investment value if you assume that the investment has been compounding over the time period.'

Which means for our asset as example:
  • Looking at the compounded annual growth rate (CAGR) of 1.8% in the last 5 years of Short Term Bond Strategy, we see it is relatively lower, thus worse in comparison to the benchmark TLT (8.5%)
  • Compared with TLT (11.9%) in the period of the last 3 years, the annual performance (CAGR) of 2% is smaller, thus worse.

Volatility:

'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:
  • Looking at the volatility of 3.2% in the last 5 years of Short Term Bond Strategy, we see it is relatively lower, thus better in comparison to the benchmark TLT (14.1%)
  • During the last 3 years, the historical 30 days volatility is 4.2%, which is lower, thus better than the value of 14.8% from the benchmark.

DownVol:

'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:
  • Looking at the downside volatility of 2.9% in the last 5 years of Short Term Bond Strategy, we see it is relatively lower, thus better in comparison to the benchmark TLT (9.7%)
  • Compared with TLT (9.9%) in the period of the last 3 years, the downside deviation of 3.8% is lower, thus better.

Sharpe:

'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.'

Applying this definition to our asset in some examples:
  • The Sharpe Ratio over 5 years of Short Term Bond Strategy is -0.22, which is smaller, thus worse compared to the benchmark TLT (0.43) in the same period.
  • During the last 3 years, the Sharpe Ratio is -0.12, which is lower, thus worse than the value of 0.63 from the benchmark.

Sortino:

'The Sortino ratio improves upon the Sharpe ratio by isolating downside volatility from total volatility by dividing excess return by the downside deviation. The Sortino ratio is a variation of the Sharpe ratio that differentiates harmful volatility from total overall volatility by using the asset's standard deviation of negative asset returns, called downside deviation. The Sortino ratio takes the asset's return and subtracts the risk-free rate, and then divides that amount by the asset's downside deviation. The ratio was named after Frank A. Sortino.'

Which means for our asset as example:
  • The ratio of annual return and downside deviation over 5 years of Short Term Bond Strategy is -0.25, which is lower, thus worse compared to the benchmark TLT (0.62) in the same period.
  • Compared with TLT (0.95) in the period of the last 3 years, the excess return divided by the downside deviation of -0.14 is lower, thus worse.

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:
  • Looking at the Downside risk index of 0.66 in the last 5 years of Short Term Bond Strategy, we see it is relatively smaller, thus better in comparison to the benchmark TLT (9.12 )
  • Looking at Downside risk index in of 0.86 in the period of the last 3 years, we see it is relatively smaller, thus better in comparison to TLT (4.6 ).

MaxDD:

'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.'

Which means for our asset as example:
  • The maximum reduction from previous high over 5 years of Short Term Bond Strategy is -9.6 days, which is greater, thus better compared to the benchmark TLT (-17.9 days) in the same period.
  • Compared with TLT (-15.7 days) in the period of the last 3 years, the maximum drop from peak to valley of -9.6 days is greater, thus better.

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 days below previous high over 5 years of Short Term Bond Strategy is 61 days, which is lower, thus better compared to the benchmark TLT (749 days) in the same period.
  • Looking at maximum time in days below previous high water mark in of 61 days in the period of the last 3 years, we see it is relatively lower, thus better in comparison to TLT (385 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.'

Applying this definition to our asset in some examples:
  • The average days under water over 5 years of Short Term Bond Strategy is 8 days, which is lower, thus better compared to the benchmark TLT (247 days) in the same period.
  • Looking at average days under water in of 8 days in the period of the last 3 years, we see it is relatively lower, thus better in comparison to TLT (120 days).

Performance (YTD)

Historical returns have been extended using synthetic data.

Allocations
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Allocations

Returns (%)

  • Note that yearly returns do not equal the sum of monthly returns due to compounding.
  • Performance results of Short Term Bond 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.