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:

'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.'

Using this definition on our asset we see for example:
  • Looking at the total return of 10.9% in the last 5 years of Short Term Bond Strategy, we see it is relatively smaller, thus worse in comparison to the benchmark TLT (32.2%)
  • Looking at total return in of 7.2% in the period of the last 3 years, we see it is relatively higher, thus better in comparison to TLT (3%).

CAGR:

'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:
  • Looking at the compounded annual growth rate (CAGR) of 2.1% in the last 5 years of Short Term Bond Strategy, we see it is relatively smaller, thus worse in comparison to the benchmark TLT (5.7%)
  • During the last 3 years, the annual return (CAGR) is 2.3%, which is higher, thus better than the value of 1% 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 historical 30 days volatility of 0.7% in the last 5 years of Short Term Bond Strategy, we see it is relatively smaller, thus better in comparison to the benchmark TLT (11.8%)
  • During the last 3 years, the 30 days standard deviation is 0.3%, which is lower, thus better than the value of 10% 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:
  • The downside deviation over 5 years of Short Term Bond Strategy is 0.8%, which is lower, thus better compared to the benchmark TLT (12.7%) in the same period.
  • Compared with TLT (10.8%) in the period of the last 3 years, the downside risk of 0.5% 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.'

Which means for our asset as example:
  • Looking at the Sharpe Ratio of -0.63 in the last 5 years of Short Term Bond Strategy, we see it is relatively smaller, thus worse in comparison to the benchmark TLT (0.28)
  • Compared with TLT (-0.15) in the period of the last 3 years, the Sharpe Ratio of -0.46 is smaller, thus worse.

Sortino:

'The Sortino ratio, a variation of the Sharpe ratio only factors in the downside, or negative volatility, rather than the total volatility used in calculating the Sharpe ratio. The theory behind the Sortino variation is that upside volatility is a plus for the investment, and it, therefore, should not be included in the risk calculation. Therefore, the Sortino ratio takes upside volatility out of the equation and uses only the downside standard deviation in its calculation instead of the total standard deviation that is used in calculating the Sharpe ratio.'

Applying this definition to our asset in some examples:
  • The downside risk / excess return profile over 5 years of Short Term Bond Strategy is -0.49, which is lower, thus worse compared to the benchmark TLT (0.26) in the same period.
  • Looking at ratio of annual return and downside deviation in of -0.32 in the period of the last 3 years, we see it is relatively lower, thus worse in comparison to TLT (-0.14).

Ulcer:

'The Ulcer Index is a technical indicator that measures downside risk, in terms of both the depth and duration of price declines. The index increases in value as the price moves farther away from a recent high and falls as the price rises to new highs. The indicator is usually calculated over a 14-day period, with the Ulcer Index showing the percentage drawdown a trader can expect from the high over that period. The greater the value of the Ulcer Index, the longer it takes for a stock to get back to the former high.'

Using this definition on our asset we see for example:
  • Looking at the Downside risk index of 0.1 in the last 5 years of Short Term Bond Strategy, we see it is relatively lower, thus better in comparison to the benchmark TLT (9.96 )
  • Compared with TLT (10 ) in the period of the last 3 years, the Ulcer Index of 0.02 is lower, 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:
  • Compared with the benchmark TLT (-17.9 days) in the period of the last 5 years, the maximum DrawDown of -0.5 days of Short Term Bond Strategy is higher, thus better.
  • During the last 3 years, the maximum DrawDown is -0.1 days, which is greater, thus better than the value of -16.7 days from the benchmark.

MaxDuration:

'The Drawdown Duration is the length of any peak to peak period, or the time between new equity highs. The Max Drawdown Duration is the worst (the maximum/longest) amount of time an investment has seen between peaks (equity highs). Many assume Max DD Duration is the length of time between new highs during which the Max DD (magnitude) occurred. But that isn’t always the case. The Max DD duration is the longest time between peaks, period. So it could be the time when the program also had its biggest peak to valley loss (and usually is, because the program needs a long time to recover from the largest loss), but it doesn’t have to be'

Applying this definition to our asset in some examples:
  • Compared with the benchmark TLT (749 days) in the period of the last 5 years, the maximum days below previous high of 53 days of Short Term Bond Strategy is smaller, thus better.
  • Looking at maximum time in days below previous high water mark in of 15 days in the period of the last 3 years, we see it is relatively lower, thus better in comparison to TLT (712 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.'

Which means for our asset as example:
  • The average days under water over 5 years of Short Term Bond Strategy is 9 days, which is lower, thus better compared to the benchmark TLT (281 days) in the same period.
  • Compared with TLT (341 days) in the period of the last 3 years, the average days under water of 3 days is smaller, thus better.

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 (%)

  • "Year" returns in the table above are not equal to 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.