Testing a Term Premium Asset Allocation Strategy

A subscriber asked about the performance of a strategy that each month allocates funds to pairs of exchange-traded fund (ETF) asset class proxies according to the term spread, as measured by the difference in yields between the 10-Year constant maturity U.S. Treasury note and the 3-Month U.S. Treasury bill (T-bill). Specifically:

• When the term spread is less than 0%, hold 50% Invesco DB Commodity Index Tracking Fund (DBC) and 50% SPDR Gold Shares (GLD), rebalanced monthly.
• When the term spread is 0% to 2%, hold 50% SPDR S&P 500 ETF Trust (SPY) and 50% iShares MSCI EAFE (EFA), rebalanced monthly.
• When the term spread is greater than 2%, hold 50% iShares 20+ Year Treasury Bond (TLT) and 50% Vanguard Real Estate Index Fund (VNQ), rebalanced monthly.

Also, how does the performance of this strategy (Term Spread Strategy) compare to that of a portfolio that each month allocates 50% to Simple Asset Class ETF Value Strategy (SACEVS) Best Value and 50% to Simple Asset Class ETF Momentum Strategy (SACEMS) equal-weighted (EW) Top 2. We begin the test at the end of June 2006, limited by SACEMS inputs. We ignore monthly rebalancing frictions for both strategies. Using monthly dividend-adjusted prices for the specified ETFs starting June 2006 and monthly gross returns for 50-50 SACEVS Best Value and SACEMS EW Top 2 starting July 2006, all through November 2022, we find that: (more…)