The SPY-TLT Universal Investment Strategy

Nov. 26, 2014 12:15 PM ETSPY, TLT, SPXS, TMV213 Comments
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Logical-Invest
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Summary

  • A simple and effective all weather SPY-TLT strategy.
  • Variable SPY-TLT allocations adapted to the market conditions.
  • 18% annual return and a Sharpe ratio of 1.66 for the last 5 years.

Introduction

This paper discusses the simple but effective method of using adaptive allocations between stock market ETFs and Treasuries. This method has been developed to replace the 100% switching used in normal rotation strategies like the Maximum Yield Rotation and the Global Market Rotation strategies.

The real world is just not a 100% "risk on" or "risk off" world. Most of the time, the best allocation is somewhere in between. The new method can be adapted for nearly all types of rotation strategies and is significantly increasing the return to risk (Sharpe) ratio of such strategies.

The SPY-TLT Universal Investment Strategy is very simple but also very effective. I am sure, such a simple investment strategy will nearly always perform better than any manual asset picking.

The UIS strategy

Probably the most basic of all rotation strategies, is the switching strategy between the S&P 500 US stock market (SPY) and long duration Treasuries (TLT).

The SPY-TLT ETF pair is very interesting, because most of the time these two ETFs profit from an inverse correlation. If there is a real stock market correction, then Treasuries like TLT have always been the assets where money flows in, rewarding holders with nice profits. Now there are two possibilities to profit from this inverse correlation.

The first is a switching strategy, which always switches to the ETF that had the best performance during the previous 3 months. This really simple switching strategy between TLT and SPY gave you a 14.8% return during the last 10 years, with twice the Sharpe ratio (return to risk) ratio of a simple SPY investment.

Another strategy would be to invest 50% of your money in SPY and 50% in TLT and do a monthly rebalancing. This gave you 8.8% return during the last 10 years.

Now let's see, how

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Disclosure: The author is long SPY, TLT. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

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