DIY tactical asset allocation (i.e. the types of public strategies that we cover on this site) has been strong through this crisis. Tactical ETFs on the other hand have struggled badly.
We track 50+ DIY TAA strategies, allowing us to draw some broad conclusions about TAA as a style. In the graph below we show the YTD performance of the average strategy that we track in orange, versus the 60/40 benchmark in blue, and 13 tactical ETFs in grey. All data is as of Tuesday, 03/24.
The average YTD return of the tactical ETFs is -20.1%, versus -6.8% for the DIY strategies and -11.6% for the benchmark.
We don’t follow this ETF space regularly, so we can’t guarantee that we haven’t missed one that performed well, but based on this sample, tactical ETFs underperformed not just DIY, but conventional buy & hold too. Not a good look when one of your primary functions is risk mitigation.
This is not a “dancing on their graves” post. Far from it. We’re in the business of TAA. From a practical perspective, we want to be better than those ETF solutions (b/c otherwise, what’s our purpose), but if there’s a false perception that TAA as a style has failed, it’s almost certainly a bad thing for us.
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What went wrong for tactical ETFs?
Over-complexity is always a potential culprit. When we quant types build these types of high visibility products, we tend to get a little too smart for our own good. We were guilty of that ourselves to a lesser degree with our own Meta Strategy. Read more.
I suspect part of the reason also has to do with timing.
This was somewhat of a fortuitous crisis for DIY TAA. TAA strategies are usually designed to trade once per month at month-end, and that’s how most of our members trade. There was enough weakness in the market at the end of February to flip many of the DIY strategies to defensive positions at month-end, but not so much that they had accumulated significant losses yet. That set them up well for March when that weakness accelerated.
Had one instead traded those strategies at any other time of the month (something our platform is designed to support), there’s a chance results would have been less impressive. If you traded a week earlier, weakness may have been insufficient to trigger a flip to defensive assets, meaning you were long risk into the void. If you traded a week later, you may have accumulated more damage before flipping defensive.
These tactical ETFs are drawing from the same fundamental concepts of trend-following and momentum that the DIY strategies are. I suspect however that the ETFs, due to both the size of their positions and their ability to employ a level of complexity that retail investors tend to eschew, may have flipped to defensive assets in a more stepped fashion that was too slow for what turned out to be an extremely fast moving crisis.
Of course, some of these ETFs are still 100% long risk assets, so we may be overthinking things. In some cases, it may just be plain ol’ poor design.
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