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:

'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 DIA (78.3%) in the period of the last 5 years, the total return of 94.8% of US Market Strategy is greater, thus better.
  • Compared with DIA (58%) in the period of the last 3 years, the total return, or increase in value of 44.7% is lower, thus worse.

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.'

Which means for our asset as example:
  • The compounded annual growth rate (CAGR) over 5 years of US Market Strategy is 14.3%, which is higher, thus better compared to the benchmark DIA (12.3%) in the same period.
  • Looking at annual return (CAGR) in of 13.1% in the period of the last 3 years, we see it is relatively lower, thus worse in comparison to DIA (16.5%).

Volatility:

'Volatility is a statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security. In the securities markets, volatility is often associated with big swings in either direction. For example, when the stock market rises and falls more than one percent over a sustained period of time, it is called a 'volatile' market.'

Applying this definition to our asset in some examples:
  • Looking at the 30 days standard deviation of 6.7% in the last 5 years of US Market Strategy, we see it is relatively lower, thus better in comparison to the benchmark DIA (13.3%)
  • During the last 3 years, the 30 days standard deviation is 6.1%, which is lower, thus better than the value of 12.7% from the benchmark.

DownVol:

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

Applying this definition to our asset in some examples:
  • Compared with the benchmark DIA (14.7%) in the period of the last 5 years, the downside volatility of 7.3% of US Market Strategy is lower, thus better.
  • Compared with DIA (14.3%) in the period of the last 3 years, the downside risk of 6.9% is smaller, thus better.

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.'

Which means for our asset as example:
  • The ratio of return and volatility (Sharpe) over 5 years of US Market Strategy is 1.75, which is greater, thus better compared to the benchmark DIA (0.74) in the same period.
  • During the last 3 years, the ratio of return and volatility (Sharpe) is 1.74, which is greater, thus better than the value of 1.1 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.'

Using this definition on our asset we see for example:
  • Looking at the excess return divided by the downside deviation of 1.6 in the last 5 years of US Market Strategy, we see it is relatively higher, thus better in comparison to the benchmark DIA (0.66)
  • During the last 3 years, the ratio of annual return and downside deviation is 1.55, which is larger, thus better than the value of 0.98 from the benchmark.

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.'

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 Ratio of 1.4 of US Market Strategy is lower, thus worse.
  • During the last 3 years, the Downside risk index is 1.26 , which is smaller, thus worse than the value of 4.12 from the benchmark.

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.'

Applying this definition to our asset in some examples:
  • The maximum reduction from previous high over 5 years of US Market Strategy is -4.6 days, which is greater, thus better compared to the benchmark DIA (-18.1 days) in the same period.
  • Looking at maximum reduction from previous high in of -4.6 days in the period of the last 3 years, we see it is relatively higher, thus better in comparison to DIA (-18.1 days).

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.'

Using this definition on our asset we see for example:
  • Looking at the maximum days below previous high of 132 days in the last 5 years of US Market Strategy, we see it is relatively smaller, thus better in comparison to the benchmark DIA (227 days)
  • Compared with DIA (161 days) in the period of the last 3 years, the maximum days under water of 93 days is lower, thus better.

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:
  • Compared with the benchmark DIA (51 days) in the period of the last 5 years, the average days below previous high of 24 days of US Market Strategy is smaller, thus better.
  • During the last 3 years, the average days below previous high is 21 days, which is smaller, thus better than the value of 40 days from the benchmark.

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.