We developed the Simple Asset Class ETF Momentum Strategy (SACEMS) about six years ago and the Simple Asset Class ETF Value Strategy (SACEVS) about two years ago independently, focusing on the separate logic of asset choices for each. As tested in “SACEMS-SACEVS Mutual Diversification”, these two strategies are mutually diversifying, so combining them works better in some ways than using one or the other. Beginning May 2017, we are making four changes to these strategies for ease of implementation and combination, with modest compromises in logic. Specifically, we are:
First, we are substituting SPDR S&P 500 (SPY) for iShares Russell 1000 (IWB) as the large-capitalization U.S. equity option in SACEMS. Considerations are:
- SPY is the equity allocation option in SACEVS, allowing coordination of positions when both strategies specify it.
- SPY and IWB are close substitutes regarding return performance.
- SPY is more liquid (based on trading volume) than IWB and has a lower expense ratio.
Second, we are substituting Vanguard REIT ETF (VNQ) for SPDR Dow Jones REIT ETF (RWR) in SACEMS. Considerations are:
- VNQ has a shorter history than RWR, the history is long enough.
- VNQ and RWR are close substitutes regarding return performance.
- VNQ is far more liquid (based on trading volume) and has a lower annual expense ratio than RWR.
We have updated the description and backtest/tracking data on the SACEMS page to reflect these two changes, which result in slight performance changes.
Third, we are substituting iShares 20+ Year Treasury Bond (TLT) for iShares 7-10 Year Treasury Bond (IEF) as the term premium position in SACEVS. Considerations are:
- TLT is the long-term U.S. Treasuries allocation option in SACEMS, allowing coordination of positions when both strategies specify it.
- TLT and IEF are similar, but the longer duration of TLT makes it a more aggressive vehicle for exploiting the term premium.
- The duration of IEF is a closer match to the 10-year U.S Treasury note yield used in SACEVS to estimate the term, credit and equity premiums.
- Substituting IEF for TLT in SACEMS materially hurts SACEMS performance.
Fourth, we are adjusting the update cycle for SACEVS from the first day of the trading month to the last day of the trading month to match the update cycle for SACEMS. Considerations are:
- Synchronizing the SACEVS and SACEMS update cycles allows coordination of SPY and TLT positions when both strategies specify them.
- The old cycle waits one day for end-of-month Baa bond yield data so that all inputs are end-of-month. Inputs are therefore matched based on measurement point, but somewhat mismatched based on when they become available.
- The revised cycle uses end-of-month data for the U.S. Treasury bill yield, the 10-year U.S Treasury note yield and the S&P 500 Index level, but prior-day Baa bond yield. The Baa bond yield input is therefore slightly mismatched based on measurement point, but the set of inputs is approximately matched on when they become available.
- Maintaining SACEVS with dividend-adjusted returns is easier using end-of-month data.
We have updated the SACEVS page to reflect these changes. There are modest improvements to compound annual growth rates for SACEVS and its benchmark 60-40 SPY-TLT portfolio but also increases in volatilities, because TLT is more volatile than IEF.
Prior background research on SACEMS and SACEVS will incorporate these changes whenever updated.
