Recent asset allocation articles (tactical or otherwise) that you might have missed:
We Are All FX Traders Now (Alpha Scientist)
Because international ETFs trading in the US (ex. EFA or EEM) are denominated in USD, most are affected not just by changes in the underlying assets, but also by changes in the exchange rate between USD and local currencies (the exception is the occasional currency-hedged ETF).
How can we suss out the true performance of those underlying assets, without the impact of currency fluctuations? Well, international ETFs usually track an index, and index providers often produce a local currency version of their indices. But that data is often not freely available, or just cumbersome to maintain. Alpha Scientist provides an alternate approach to get you in the ballpark*.
In the graph below, we’ve used Alpha Scientists’ method* to compare YTD returns (blue) for six especially USD-sensitive international ETFs, versus YTD returns adjusted for changes in USD (orange). Note the drag on returns this year as a result of USD strength.
If the USD index is predictable, and we know that it is predictive of these ETF returns. I wonder then whether timing USD could make for a good input to a TAA strategy.
“2D Asset Allocation” using PCA (Part 2) (CSS Analytics)
Brilliant little TAA strategy from David Varadi. In short, uses Principal Component Analysis (PCA) to divide an asset universe into two dimensions – offensive and defensive – by isolating positive versus negative weights. Then it uses a simple trend-following measure to switch between the two. We love outside the box ideas. Expect to see this strategy added to our site in the near future.
Our Own Worst Enemy (Alpha Scientist)
This post isn’t about TAA, but it is relevant to why investors desperately need a quantitative approach to trading (like TAA). Alpha Scientist takes a crack at measuring the “behavior gap” for ETFs, complete with code so you can roll your own. The behavior gap is the difference between an investment’s return, and the average investor’s return in that investment. As one would expect, investors tend to do poorly, buying high and selling low.
The State of Risk Management (Newfound Research)
Great post from Newfound looking at eight approaches to managing equity risk exposure. A simple tactical strategy has been a solid (but like all strategies, sometimes imperfect) approach.
Timing Equity Returns Using Monetary Policy (Newfound Research)
And yet another great post from Newfound looking at the old saw that expansionary (contractionary) monetary policy is good (bad) for equities. Yes, it appears that way at first glance, but like most stock market conventional wisdom, it’s less impressive under closer inspection.
Other recent links that you might have missed:
- Mean Reversion and Bond ETF Returns (Newfound Research)
- Momentum Solutions for Retirement (Dual Momentum)
- Warning: Stock and Bond Correlation Assumptions are Regime Dependent! (Alpha Architect)
- Trade Optimization (Newfound Research)
- PPI and the Stock Market (CXO Advisory)
Recent goodness from Allocate Smartly:
- Two New Strategies Added: Defensive Asset Allocation and Accelerating Dual Momentum
- How Members Are Using Our Site and What That Says About TAA Investors
- Tactical Asset Allocation in August
We invite you to become a member for about a $1 a day, or take our platform for a test drive with a free limited membership. Put the industry’s best tactical asset allocation strategies to the test, combine them into your own custom portfolio, and then track them in near real-time. Have questions? Learn more about what we do, check out our FAQs or contact us.
(*) The downsides of this approach are (a) it doesn’t account for legitimate changes in asset valuation driven by changes in USD, and (b) the dollar index is dominated by the Euro and may not be representative of some assets – using specific currency pairs may be more useful here. Also, a calculation note: we made one small change to Alpha Scientists’ approach. We used the trailing 5 years to calculate the hedge ratio (as opposed to 2010 and beyond).