Quarterly Tactical Strategy Backtested To 2003: CAGR Over 28% And Consistent Positive Returns

Summary

• A quarterly Tactical Asset Allocation Strategy has been developed for a basket of eight mutual funds plus a cash mutual fund.
• Backtested results (2003-present) are: CAGR=28.7%, maximum drawdown=19.1%, positive returns every year, and beat the S&P 500 every year except 2013 (25.6% vs. 32.3%).
• The same strategy is tested with ETF replacements, all having very high correlation with their corresponding mutual fund.
• Backtested results (2010-present) with the ETFs accurately duplicate the results with the mutual funds, giving confidence in the ETF representation of the strategy.

Please be advised that you use this information at your own risk.

Some people have expressed the need to use mutual funds instead of ETFs in a Tactical Asset Allocation (TAA) strategy. And instead of using semi-monthly updates (twice per month), quarterly updates are desirable because many platforms do not allow more frequent trading for mutual funds. Therefore, I set out to develop a TAA strategy with mutual funds using ETFreplay. ETFreplay has a rather limited basket of mutual funds to choose from (mainly Vanguard funds), but it has enough diversity to develop a good TAA strategy.

For this TAA strategy, I chose eight mutual funds from eight different asset classes. Requirements of each mutual fund included high correlation to an ETF so ETFs could replace the mutual funds if desired. Here is the list of mutual funds selected:

1. Vanguard Small Cap Index (NAESX)
2. T Rowe Price Emerging Markets Bond (PREMX)
3. Vanguard Emerging Markets (VEIEX)
4. Vanguard Intermediate-Term Investment Grade Bond (VFICK)
5. Vanguard GNMA Mortgage (VFIIX)
6. Vanguard S&P 500 Index (VFINX)
7. Vanguard MSCI REIT (VGSIX)
8. Vanguard Total International Stock Index (VGTSX)
9. Cash = Vanguard Long-Term Treasury (VUSTX)

The corresponding list of ETFs is:

1. Vanguard U.S. Small Cap (VB)
2. Vanguard Emerging Market Government Bond (VWOB)
3. Vanguard FTSE Emerging Markets (VWO)
4. Vanguard Intermediate Corporate Bond (VCIT)
5. Vanguard Mortgage-Backed Bonds (VMBS)
6. SPDR S&P 500 Index (SPY)
7. Vanguard MSCI U.S. REIT (VNQ)
8. Vanguard FTSE All-World ex-U.S. (VEU)
9. Cash = iShares Barclays Long-Tern Treasury (TLT)

I proceeded to develop a tactical strategy with the mutual funds using the backtested results of ETFreplay. Although the mutual funds go back to 1996 and beyond, backtesting could only go back to 2003 because that is a limitation of ETFreplay (wish they would change that). I know a number of my readers have developed spreadsheets that mimic ETFreplay calculations, and I would be