Fire Your Investment Manager: Ideas For An Ultra-Low Volatility Index Part V

Includes: SPLV, TMF
by: Harry Long


Our provisional Ultra-Low Volatility Index has reached an all time high.

It handled recent market volatility splendidly.

Recent market volatility has served as an excellent out-of-sample test.

As before, here are the provisional Ultra-Low Volatility Index strategy's rules.

  1. Buy the PowerShares S&P 500 Low Volatility ETF (NYSE:SPLV) with 80% of the dollar value of the portfolio.
  2. Buy the Direxion Daily 20+ Yr Trsy Bull 3X ETF (NYSEARCA:TMF) with 20% of the dollar value of the portfolio.
  3. Rebalance annually to maintain the 80%/20% dollar value split between the positions.

Here are the results in a linear scale:

There is no denying that the performance of the strategy has destroyed the S&P 500 on a risk/return basis.

The outperformance continues in the last 12 months:

The last 6 months:

The last 3 months:

And YTD 2015:

Personally, even though the performance is outstanding, I do not feel comfortable with strategies which do not use multiple markets for hedging, but for investors who only like stock/bond mixes, this strategy index is interesting food for thought.

I do not feel comfortable with strategies which rely heavily upon bonds as the hedging mechanism for equity exposure , because these strategies, such as risk parity, have benefited from a multi-decade secular bond bull market.

As Bruce Kovner once said, one of his main jobs is to imagine configurations of the world that do not yet exist, but could. I believe that a multi-year, secular bear market in bonds is a high probability potential future event path. Therefore, I believe that hedging using multiple markets is the responsible thing to explore, even though our ideas for an Ultra-Low Volatility index have performed well historically and in the very recent past.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.