SPY-TLT Universal Investment Strategy 20 Year Backtest

Jan. 15, 2015 10:54 AM ETSPY, TLT, VFINX, VUSTX68 Comments
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  • 20 year strategy backtest using Vanguard VFINX/VUSTX index funds as a proxy for SPY/TLT.
  • The strategy uses an adaptive SPY/TLT allocation, depending of the market environment.
  • The strategy achieves 2x the return to risk ratio and a 5x smaller max drawdown than a buy and hold S&P 500 investment.

In a previous article "The SPY-TLT Universal Investment Strategy" I presented a simple strategy which allowed to obtain an excellent return to risk ratio only by investing in variable allocations to the SPDR S&P 500 Trust ETF (SPY) and the iShares 20+ Year Treasury Bond ETF (TLT) allocations. The allocation of the SPY/TLT pair is rebalanced monthly using a modified sharpe formula. For the new month, the strategy always uses the allocation ratio which achieved the highest modified sharpe ratio for a given lookback period. Here the algorithm uses a 72 day lookback period and a volatility factor of 2.5 in the modified sharpe formula:

sharpe=72 day return/72 day standard deviation ^ 2.5.

Several readers asked me now to present a longer backtest of this strategy.

Using the Vanguard Five Hundred Index Fund Inv (VFINX) and the Vanguard Long Term Treasury Fund Inv (VUSTX) as a proxy to the SPY/TLT ETFs, here is now a 20 year backtest for the UIS strategy. These index funds are only used to do the 20 year backtest. To run the strategy you would still invest using SPY and TLT. You can also use futures (ES/UB) or leveraged ETFs (Direxion Daily S&P 500 Bull 3X Shares ETF (SPXL)/ Direxion Daily 30-Year Treasury Bull 3x Shares ETF (TMF) or Direxion Daily S&P 500 Bear 3X Shares ETF (SPXS)/ Direxion Daily 30-Year Treasury Bear 3x Shares ETF (TMV)) instead. This is explained in detail in my previous article.

With these two Vanguard funds, this is now one of the rare strategies which can be easily backtested for such a long period. In general however, I think that it is much more important, how a strategy performed after 2008. The market has changed considerably during these last years, and if you would only invest in strategies which can be backtested 20 or more

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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 (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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