A Conservative Tactical Momentum Strategy Using Bond ETFs

Aug. 24, 2015 8:27 AM ETCWB, CNSAX, JNK, FAHDX, TLT, VUSTX, SHY, VFISX, PCY, PREMX95 Comments
Cliff Smith profile picture
Cliff Smith


  • A simple tactical asset allocation strategy is described that selects one ETF each month from a basket of 5 essentially non-correlated bond ETFs.
  • 4-month and 2-month returns are used to determine the top-ranked ETF each month.
  • The backtest results of the strategy (1998 - present) using mutual fund proxies for the ETFs indicate a CAGR of 14.8% and a maximum monthly drawdown of -10.7%.
  • There are no negative annual returns even in 2001, 2002 and 2008.
  • Any investor can easily set up and trade the strategy using the free Portfolio Visualizer software.

In the current market turmoil, many investors are looking for a more conservative bond strategy to reduce risk. In this article, I present a new bond tactical asset allocation strategy that is relatively simple and may be attractive to such investors.

One of the obstacles in developing a tactical bond strategy is the short history of bond ETFs. This allows rather limited backtesting of bond ETFs. In order to extend the backtesting timeframe, mutual funds that have longer histories are selected as proxies to the ETFs. The proxy mutual funds are selected based on correlation and performance with their ETF counterparts.

The strategy was developed using the free Portfolio Visualizer (PV) software. I first selected bond assets that were relatively non-correlated to each other. Shown below is the basket of assets I decided to use; the basket is similar to the basket used by Frank Grossmann in his "Bond Rotation 'Sleep Well' Strategy." I have listed the ETFs followed by its mutual fund proxy and the average correlation coefficient between ETF and mutual fund proxy.

Convertible Bonds: SPDR Barclays Capital Convertible Bond ETF (CWB) - Invesco Convertible Securities Fund (CNSAX) (Correlation = 0.84)

High Yield Bonds: SPDR Barclays Capital High Yield Bond ETF (JNK) - Fidelity Advisor High Income Advantage Fund (FAHDX) (Correlation = 0.63)

Long Term Treasury: iShares 20+ Year Treasury Bond ETF (TLT) - Vanguard Long Term Treasury Fund (VUSTX) (Correlation = 0.98)

Short Term Treasury: iShares 1-3 Year Treasury Bond ETF (SHY) - Vanguard Short Term Treasury Fund (VFISX) (Correlation = 0.80)

Emerging Market Bonds: PowerShares Emerging Markets Sovereign Debt Portfolio ETF (PCY) - T. Rowe Price Emerging Markets Bond Fund (PREMX) (Correlation = 0.40)

PREMX is the only proxy that has somewhat poor correlation to its ETF cousin PCY, but it was the best I could do. A

This article was written by

Cliff Smith profile picture
Now in retirement and trying to preserve (and grow) my life savings, I currently have a strong interest in tactical asset allocation strategies and permanent portfolios, and have studied them extensively. I have developed a number of tactical strategies involving the periodic trading of mutual funds and ETFs. These strategies have been extensively backtested using the Portfolio Visualizer (PV) software. My goal is to earn 8-10% annually with no negative years, to have maximum drawdowns (on a monthly basis) less than 3%, and to have monthly win rates over 80%. The strategies include purchasing a limited number of assets with the highest growth and lowest volatility, and minimizing risk using dual momentum, relative strength, moving average and risk parity methods. My emphasis is on bond strategies, although I have developed some equity strategies.I publish a free monthly article on Seeking Alpha Instablog that presents each month's selections of the strategies I invest in. I provide PV links to all of my strategies.I am currently a retired Aerospace Engineer. I am married with three children and nine grandchildren. I was born in San Francisco, CA in 1949 and moved to Newport News, VA in 1951 where I lived until I went to college. By God's grace, I received a B.S. degree from Virginia Tech (1972), a M.S. degree from Caltech (1973), and a M.A. - Biblical Studies degree from Birmingham Theological Seminary (2013). I worked at Pratt & Whitney (1973-1986) and CFD Research Corporation (1987-2008).

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. I have no business relationship with any company whose stock is mentioned in this article.

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