Within 95% of 12-month High Strategy?

A subscriber asked for confirmation that the strategy described at “Meb Faber’s 12-Month High Switch” (the strategy) is attractive. This strategy at each monthly close:

• Calculates the 12-month high for: SPDR S&P 500 ETF Trust (SPY), iShares MSCI EAFE ETF (EFA), Vanguard Real Estate Index Fund ETF Shares (VNQ), SPDR Gold Shares (GLD) and Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC) based on dividend-adjusted prices.
• Allocates 20% of the portfolio to each asset currently within 5% of its 12-month high.
• Allocates any remaining funds to iShares 7-10 Year Treasury Bond ETF (IEF) if IEF is within 5% of its 12-month high, or otherwise to cash with return estimated by the yield on 3-month U.S. Treasury bills (T-bill).
• Rebalances to equal weights each month and applies trading frictions of 0.1% per 1-way trade for any switches in holdings.

To investigate, we replicate the strategy, substituting Invesco DB Commodity Index Tracking Fund (DBC) for PDBC to get a longer sample period that includes the 2008-2009 financial crisis. We use an equal-weighted (EW), monthly rebalanced combination of SPY, EFA, VNQ, GLD and DBC as a benchmark. We apply 0.1% frictions to ETF switches but not to simple rebalances, which are generally small. Using monthly dividend-adjusted prices for SPY, EFA, VNQ, GLD and DBC during February 2006 (DBC inception) through June 2024, we find that: (more…)