Description of Short Term Bond Strategy

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 of Short Term Bond Strategy (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.'

Applying this definition to our asset in some examples:
  • Looking at the total return, or increase in value of 11.2% in the last 5 years of Short Term Bond Strategy, we see it is relatively smaller, thus worse in comparison to the benchmark TLT (17.3%)
  • During the last 3 years, the total return, or performance is 8%, which is lower, thus worse than the value of 22.7% from the benchmark.

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:
  • Compared with the benchmark TLT (3.3%) in the period of the last 5 years, the annual performance (CAGR) of 2.1% of Short Term Bond Strategy is lower, thus worse.
  • During the last 3 years, the compounded annual growth rate (CAGR) is 2.6%, which is smaller, thus worse than the value of 7% from the benchmark.

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.'

Using this definition on our asset we see for example:
  • Looking at the volatility of 0.5% in the last 5 years of Short Term Bond Strategy, we see it is relatively lower, thus better in comparison to the benchmark TLT (12%)
  • Compared with TLT (10.4%) in the period of the last 3 years, the historical 30 days volatility of 0.3% is lower, thus better.

DownVol:

'The downside volatility is similar to the volatility, or standard deviation, but only takes losing/negative periods into account.'

Which means for our asset as example:
  • The downside volatility over 5 years of Short Term Bond Strategy is 0.6%, which is lower, thus better compared to the benchmark TLT (12.9%) in the same period.
  • During the last 3 years, the downside risk is 0.5%, which is lower, thus better than the value of 10.9% from the benchmark.

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.'

Using this definition on our asset we see for example:
  • Looking at the Sharpe Ratio of -0.76 in the last 5 years of Short Term Bond Strategy, we see it is relatively lower, thus worse in comparison to the benchmark TLT (0.06)
  • Looking at Sharpe Ratio in of 0.27 in the period of the last 3 years, we see it is relatively lower, thus worse in comparison to TLT (0.44).

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 -0.55, which is lower, thus worse compared to the benchmark TLT (0.06) in the same period.
  • Compared with TLT (0.41) in the period of the last 3 years, the downside risk / excess return profile of 0.18 is lower, thus worse.

Ulcer:

'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:
  • Looking at the Ulcer Index of 0.04 in the last 5 years of Short Term Bond Strategy, we see it is relatively smaller, thus better in comparison to the benchmark TLT (10 )
  • Compared with TLT (4.42 ) in the period of the last 3 years, the Downside risk index of 0.01 is smaller, thus better.

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:
  • Looking at the maximum drop from peak to valley of -0.4 days in the last 5 years of Short Term Bond Strategy, we see it is relatively higher, thus better in comparison to the benchmark TLT (-17.9 days)
  • Compared with TLT (-10.7 days) in the period of the last 3 years, the maximum reduction from previous high of -0.1 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.'

Applying this definition to our asset in some examples:
  • Looking at the maximum days under water of 43 days in the last 5 years of Short Term Bond Strategy, we see it is relatively smaller, thus better in comparison to the benchmark TLT (749 days)
  • Looking at maximum time in days below previous high water mark in of 10 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 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.'

Applying this definition to our asset in some examples:
  • Looking at the average days below previous high of 5 days in the last 5 years of Short Term Bond Strategy, we see it is relatively lower, thus better in comparison to the benchmark TLT (279 days)
  • During the last 3 years, the average days under water is 2 days, which is smaller, thus better than the value of 117 days from the benchmark.

Performance of Short Term Bond Strategy (YTD)

Historical returns have been extended using synthetic data.

Allocations of Short Term Bond Strategy
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Allocations

Returns of Short Term Bond Strategy (%)

  • 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.