A Multi-Asset Class Quant Global Macro Index Which Shines

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Includes: EUO, SPLV, TMF, ZIV
by: Harry Long

Summary

Multi-asset class indices are key.

They combine diversification with potential upside.

Many multi-asset class indices underperform equities.

This index strongly outperforms equities.

Here are the index's rules:

I. Buy ZIV (NASDAQ:ZIV) with 15% of the dollar value of the portfolio.

II. Buy SPLV (NYSEARCA:SPLV) with 50% of the dollar value of the portfolio

III. Buy TMF (NYSEARCA:TMF) with 15% of the dollar value of the portfolio.

IV. Buy EUO (NYSEARCA:EUO) with 20% of the dollar value of the portfolio.

V. Rebalance annually to maintain the 15%/50%/15%/20% dollar value split between the instruments.

Do note that this index was created with the benefit of hindsight. Here are the results:

Click to enlarge

Click to enlarge

Investors need a strategy index which allows the investor to hang on during massive equity market drops in order to enjoy the bounce backs. The low correlation of this index to the SPY helps achieve that goal.

Indeed, in 2011 the S&P 500 had an almost 20% drawdown. The ZOMMA Quant Warthog index only dropped 5%. This allows investors to hang on emotionally and enjoy the subsequent rise.

The components of the index were chosen for logical reasons. ZIV tends to truly shine during a sideways market, because it is often pocketing contango, or synthetic time decay.

TMF through its long duration government bond exposure and EUO through its synthetic long dollar exposure provide the hedges for the strategy.

In addition, in a rising interest rate environment, long-dated government bonds often get slammed, but the higher interest rates lead the dollar to strengthen, causing the EUO ETP to appreciate.

Over a full market cycle, this strategy index tended to have very moderate returns, but with a decent Sharpe ratio.

The intuition behind this strategy index is that it generates return through the SPLV S&P 500 low volatility ETF and the ZIV inverse Mid-Term volatility ETN.

ZIV tends to truly shine during a sideways market, because it is often pocketing contango, or synthetic time decay.

TMF through its long duration government bond exposure and EUO through its synthetic long dollar exposure provide the hedges for the strategy.

In addition, in a rising interest rate environment, long-dated government bonds often get slammed, but the higher interest rates lead the dollar to strengthen, causing the EUO ETP to appreciate.

As we've seen, the components of this index were rationally chosen, and the performance reflects that.

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Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown; in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points, which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program, which cannot be fully accounted for in the preparation of hypothetical performance results and all which can adversely affect trading results.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.