Tag Archives: biv

Current Recommendations For Dual Momentum Portfolio

How to construct a dual momentum portfolio using a few simple rules. Applying absolute and relative momentum to build a portfolio. Current recommendation is to invest 100% of the portfolio in U.S. Equites. Gary Antonacci’s popular book, Dual Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk is used as a template for the following analysis. The primary deviation from Antonacci’s logic is the choice of securities used to populate the portfolio. To hold down trading costs, the following commission free ETFs from TDAmeritrade are used. They are: VTI – Vanguard Total Stock Market ETF VEU – Vanguard FTSE All-World ex-US ETF BIV – Vanguard Intermediate – Term Bond ETF SHY – iShares 1-3 Year Treasury Bond SHY is not used as a potential investment, but rather serves as a cutoff or “circuit breaker” ETF. The dual momentum rules are quite simple as they make use of absolute and relative momentum principles. Absolute momentum is where the investor examines the performance of the security with respect to its own past. Relative momentum is where the investor compares the trend or past performance with respect to other securities. Dual momentum makes use of both concepts. Antonacci recommends a look-back period of one year or 252 trading days with a monthly review. Think of this as one of those monthly reviews. With the ETFs selected for possible purchase, the cutoff ETF ((NYSEARCA: SHY ))) identified, and the look-back period settled, here are the few rules for portfolio management. This is a simplification of the diagram shown on page 101 of the dual momentum text. Rank VTI and VEU with respect to SHY. If both VTI and VEU rank above SHY, invest 100% of the portfolio in the highest ranked ETF. VTI is that ETF in this review. If neither VTI or VEU rank above SHY, invest 100% in the bond ETF, BIV. Other options for bonds are AGG or BND. I selected BIV for this example as I expect interest rates will rise so I am reluctant to use long-term bond ETFs. Wait a month for the next review. Current Recommendations: Based on 11/23/2015 data and a look-back period of 252 trading days, the highest ranking ETF on an absolute scale is VTI. Since it is ranked higher than VEU and is performing above SHY, we invest 100% of the portfolio in VTI. Had VEU ranked above VTI and SHY, 100% would have been invested in VEU. If neither VTI or VEU ranked above SHY, 100% of the portfolio would go to BIV. (click to enlarge) The above worksheet is designed for a more complex portfolio, but still works for a dual momentum portfolio with very minor adjustments.

BIV: Excellent Diversification In A Single Bond ETF

Summary BIV offers investors exposure to both corporate bonds ranging from triple A to Baa and U.S. government debt. The inclusion of lower credit rating debts is allowing the ETF to offer more respectable yields. If investors wanted to get a large portion of their domestic bond exposure through a single ETF, BIV would be an extremely strong contender. I still prefer BIV in the context of a diversified portfolio, but it can eliminate the need for some other bond holdings. The Vanguard Intermediate-Term Bond Index ETF (NYSEARCA: BIV ) is a very interesting bond fund. As I’ve been searching for appealing bond funds, I’ve found some of my favorites are from Vanguard. Given my distaste for high expense ratios, it should be no surprise that the Vanguard products would be appealing. Quick Introduction The Vanguard Intermediate-Term Bond Index ETF is showing a yield to maturity of 2.7% and an average duration of 6.5 years. The yields are not high, but the duration is also not very long. All around, so far this seems fairly reasonable. If an investor wanted to use a single ETF for a large portion of their bond portfolio, this would be an option that could get it done without generating excessive amounts of risk. Credit Quality The following chart breaks down the credit quality of the issues being held in the portfolio. The lowest ratings are Baa, which is high enough that I’m not very concerned about the credit risk. However, the use of the lower rated credit securities is critical to allowing the ETF to establish a yield that is not horrible. This is a case of a fairly diversified portfolio in terms of credit ratings and it provides investors with an option for grabbing most of their domestic bond exposure within a single holding. Maturities I grabbed another chart to show the effective maturity on the securities: The maturity profile for the Vanguard Intermediate-Term Bond Index ETF shows that an investor looking for domestic bond exposure would be wise to focus on surrounding the ETF with very short durations or longer durations. The portfolio has great diversification across credit ratings but the maturities are heavily focused. A Hypothetical Portfolio I put together a very simple sample portfolio using Invest Spy. Due to some of the ETFs being newer the sample period is limited to a little over two years. (click to enlarge) This hypothetical portfolio is weighted to 60% equity and 40% bonds. To break that down the weights from the equity section are 30% total market index (NYSEARCA: VTI ), 10% equity REITs (NYSEARCA: VNQ ), 5% Utilities, 5% Consumer Staples (NYSEARCA: VDC ), 10% International Equity. The bond section is holding 10% in junk bonds (NYSEARCA: JNK ), 5% in extended duration treasuries (NYSEARCA: EDV ), 5% in emerging market government bonds (NASDAQ: VWOB ), 5% short term corporate debt (NASDAQ: VCSH ), 5% in short term government debt (NASDAQ: VGSH ), 5% in mortgage backed securities (NASDAQ: VMBS ), and 5% in intermediate-term corporate bonds . This portfolio won’t be perfect for hitting the efficient frontier, but it should beat the vast majority of real portfolios investors are using on a risk adjusted basis. If long term rates were higher I would have used a higher weighting for long duration bonds due to their exceptionally correlation to major equity classes. My disclosure already states it, but I’ll reiterate that I am long VTI and VNQ. Annualized Volatility When measuring risk adjusted returns for a portfolio the most efficient method is usually to use the Sharpe ratio. For that ratio we are taking the total return annualized return and subtracting the risk free rate. Then we divide the resulting number by the annualized volatility. The problem is that this metric is only really known after the fact. Predicting the level of returns in advance is problematic but correlations and relative volatility are more reliable over time than returns. Within the chart investors can see the annualized volatility of each holding as well as the resulting annualized volatility for the portfolio. While some holdings have higher annualized volatility scores, such as EDV, the ETF makes up for that by having negative correlation to a few of the equity holdings. As a result, the ETF only contributes .6% of the total risk in the portfolio. An Alternative Composition BIV is showing more annual volatility than VMBS, VGSH, and VCSH but it is also offering stronger yields. If an investor wanted to simplify the portfolio, they could raise the exposure to BIV and drop the exposures outside of EDV and VWOB. I prepared a second chart that demonstrates the same portfolio with BIV elevated to 20% of the portfolio and VMBS, VGSH, and VCSH eliminated. This portfolio would have significantly less short term exposure and no exposure to Mortgage-Backed Securities. (click to enlarge) This second portfolio is showing precisely what investors should expect. The annualized volatility increased slightly from 7.0% to 7.1%, but the total return over the period (about 26 months) increased from 19.8% to 20.1%. This bond allocation that relies more heavily on BIV is slightly more aggressive but it is also simpler to put in place. Correlation I want to dive a little deeper into the correlation statistics. The table below provides the correlation across each of those ETFs which should make it very quick to see which ones are work very well together. When a correlation is shown in the tan color it indicates a negative correlation which is very attractive for reaching the efficient frontier. You’ll notice that quite a few of the bond funds have negative correlations to VTI and the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ). Since VTI and SPY have a correlation ranging between 99% and 99.9% depending on the measurement period, it should not be surprising that those two funds have very similar correlations to other holdings. Here is the correlation table: (click to enlarge) BIV has a negative correlation to the market in general as demonstrated by the -.15 correlation to both VTI and SPY and virtually no correlation to foreign markets or consumer staples. On the other hand, it does show correlations to VNQ (which is REITs) and VPU (which is utilities) because those investments are both considered income investments. Conclusion BIV is one of the best options available for an investor that wants to reduce the number of tickers they need to follow. If an investor uses it to eliminate other short term bond funds they may see a slight increase in portfolio volatility as well as a slight increase in the expected returns on the portfolio. There are few bond funds that I think work well as such a large portion of the bond holdings within a portfolio, but BIV does it quite well. Since the holdings are limited to intermediate term domestic securities, it is still reasonable to maintain a small longer term allocation and an international allocation. Disclosure: I am/we are long VTI, VNQ. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.