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Tactical Strategies For 2019


2018 has been a difficult year for my tactical momentum strategies; yet my accounts show a 2.5% total return YTD compared to -0.56% for AGG and -9.7% for S&P500 Index.

I think 2019 will be difficult for equities, and I plan on investing mainly in my low volatility bond strategies to reduce risk and drawdown in my portfolio.

For 2019, I have tweaked my low volatility bond strategies, and will eliminate some of my weaker strategies including my volatility targeting models that utilize large cap equities.

My two best strategies proposed for 2019 are versions of the Enhanced Low Volatility Strategy [ELVS] utilizing bond mutual funds and the weekly Modified Defensive Bond Strategy [MDBS] employing ETFs.

I also plan on investing in TrendXplorer's VAA-G4 strategy that includes risk-on ETFs (VOO, VEA, VWO and BND) and risk-off ETFs (SHY, IEF or LQD).

Overview of 2018 

To start off, I want to say that I have learned a lot this year in implementing tactical strategies that focus on low volatility and low drawdown. As a retired investor, I strongly dislike volatility and drawdown; there are no second chances for retirees like young investors have. My strategies in 2018 mainly concentrated on bond mutual funds, although I did have some strategies that included equities and bond ETFs. I have accounts at Schwab and Vanguard.

2018 was a difficult year for all tactical strategies; all you have to do is go to Allocate Smartly and see how some of the best available tactical strategies have performed in 2018.  The difficulties in tactical strategies in 2018 were caused by large downturns in two time periods (the month of February and October-to-present) in which both equity and bond markets fell precipitously and without warning. And, to make matters worst, the losses started almost immediately after assets were purchased (at the beginning of the month). Although my low volatility bond strategies utilize short duration timing periods, they were still not able to catch the market reversals and avoid substantial monthly losses. So most of my strategies had rather large monthly losses (1-2%) in February and October of 2018. It was hard to just sit there and not act, and on a number of occasions I did act once it was apparent an asset was in a nosedive. From now on, I'm going to try to avoid these large monthly losses by using stop losses during the month, and I've asked Tuomo at Portfolio Visualizer if he could implement stop losses in his momentum models. Probably won't happen, but I have asked.

Update: Here is how Tuomo responded:

Thank you for the good suggestions. We are already tracking stop-loss support as an upcoming improvement, but I do not yet have a date on when we would make this functionality available on the live site. I'm curious to see how that impacts historical backtests, could make a big difference in some models if there are volatility periods similar to what we have seen over the past few months.

But, as I write this article after market close on December 21st, my eight strategies have produced overall YTD returns of about 2.5% with very low volatility and very low drawdown. Thus my strategies have done better than total bond ETFs like AGG (-0.56% YTD), and the S&P 500 index that is down 9.6% YTD (17% since October 1st). So I guess my results are not too bad.

But there are always ways to try and improve tactical strategies, and I continue in my efforts to do so. For 2019, I have tried to tweak some of my better 2018 strategies, and I plan on eliminating some of my weaker strategies. I'm personally going to stay away from equities and just concentrate on bond strategies in 2019 to reduce volatility/drawdown. Even if the FED raises the overnight rates two times in 2019 (not sure if that will really happen), I think the bond strategies will do fine, either being in a safe haven like a money market fund or in other lower risk assets like mortgage backed securities. [By the way, I have come to realize that GNMA/mortgage backed securities like VFIIX correlate well with 7-10 year treasuries like VFITX (0.83 correlation from 1991 - present), and VFIIX has much lower volatility than VFITX (daily, monthly and annually). So that is why I prefer VFIIX rather than mid-term treasuries in low volatility strategies. I'm always looking for lower volatility assets for my strategies.]

My Strategies for 2019

I have decided to concentrate on low volatility bond strategies in 2019; I am not going to invest in strategies that employ large cap equities like VFINX (or VOO or SCHX) or convertible bonds like VCVSX. For the most part, I am going to refrain from owning assets that can produce high monthly losses, even at the expense of lower returns in the process. I think 10% annual returns are still possible in the long run if we avoid large drawdowns, but I don't expect a 10% return in 2019. I'm hoping for something more in the 6-8% range; that would be fine by me.

Having said that, I will be investing in one strategy that utilizes equity ETFs as risk-on assets together with bond ETFs (SHY, IEF or LQD) as risk-off assets. It will not be my own strategy, but one developed by TrendXplorer, i.e. his VAA-G4 strategy. I will talk more about this strategy in a moment.  

The two best bond strategies that I have conceived over the past few years are: 1) the Enhanced Low Volatility Strategy [ELVS] that uses mutual funds and is updated monthly and 2) the Modified Defensive Bond Strategy [MDBS_ETF] that employs ETFs and is updated weekly.

Original ELVS

Let me now discuss ELVS. There are various versions of ELVS, but perhaps the best one appears to be the original version that selects one mutual fund from a basket of five mutual funds of different classes (high yield corporate bond = WHIYX, high yield municipal bond = NHMAX, senior floating-rate bank loan = OOSAX, GNMA/mortgage-backed securities = VFIIX, and short-term treasuries = GSSDX). These classes of bonds are employed because of their non-correlation to each other, both overall and over shorter time periods. The original ELVS uses the relative strength model in PV (no absolute momentum), and timing periods are 15-days (51% weighting of ranking) and 2-months (49% weighting of ranking). GSSDX is considered to be the out-of-market [OOM] asset in this case. Here is the PV link: I first conceived ELVS and wrote a SA article on it in January 2017.

The original ELVS can be backtested to 2000, and it has produced real money (out-of-sample) returns of 8.7% in 2017 and 4.8% YTD (thru December 21st including EOM distribution). Some of my followers have used this version of ELVS and have seen this level of return. Maximum Drawdown [MaxDD] from 2017 - 2018 is -0.64% based on monthly returns. The annualized volatility is 2.2% from 2017 - present; this compares to an annualized volatility of 9.2% for VFINX over this time period.

Other ELVS Versions

Although the original version of ELVS is pretty good, I believe some other versions may be better. Although some of my followers like modified versions that include SEMPX and/or PONAX in the basket of funds, (known as the six-fund version and/or the seven-fund version), I am not going to track these versions anymore. But I do have some alternate ELVS versions that I have been studying and developing. I mainly like these new versions because they either reduce risk or they have performed well in 2018. I have spent a lot of time researching other mutual funds that are in the same classes as the ones in the original suite, looking for lower volatility while maximizing growth. I think lower volatility will produce not only lower drawdowns but also higher monthly win rates. Low volatility is a key factor why my tactical strategies successfully utilize extremely short duration timing periods (look-back periods). Equity strategies have much higher volatility that require the use of longer duration timing periods (usually 10-12 months) to overcome market noise, and, in the end, they are less response to market conditions, have much higher drawdowns and have more whipsaw. That is why I prefer low volatility bond strategies that can still produce average annual returns around 10%.

Duplicate Fund Version of ELVS: DF_ELVS

One version of ELVS that I like is the duplicate fund version [DF_ELVS]. Rather than using the relative strength model as the original ELVS does, DF_ELVS utilizes the dual momentum model. By so doing, one of the classes of bonds can be eliminated from the basket of funds (the short term treasury asset) because CASHX (1-3 month T-Bills) has replaced it in the rankings. So for DF_ELVS, I use eight funds that align with the same four classes of the original ELVS suite of funds. In essence, each class of bond asset now has two representative funds. The timing periods are identical with the original ELVS, and the only other change is that the two top-ranked funds are bought each month rather than only the top-ranked fund. Buying the two top-ranked funds ends up reducing strategy volatility and drawdown.

The basket of funds for DF_ELVS is comprised of [OOSAX, EBFAX], [WHIYX, EVIBX], [NHMAX, CXHYX], and [VFIIX, LEXNX]. The out-of-market [OOM] asset is CASHX. This strategy can be backtested to 2000; the PV link is The backtest results are: CAGR = 10.7%, MaxDD = -2.9%, and monthly win rate = 84%. The 2018 YTD return (through December 21st plus EOM distribution) is 3.3%.

DF_ELVS can be backtested to 1991 if we substitute some funds that have longer histories. There are still two funds in each of the four bond classes. For the backtest to 1991 I used these funds: [BFRAX, EBFAX], [EVIBX, FIFIX], [MMHYX, CXHYX], and [VFIIX, LEXNX]. Here are the summary backtest results: CAGR = 9.7%, MaxDD = -3.0%, Worst Year = +2.2%, and monthly win rate = 82%. In 2018, the return YTD (including EOM distribution) is 3.7%. So it can be seen that the strategy produces similar results if the backtest is extended to 1991 using funds with longer histories. 

The actual DF_ELVS that I will be using in 2019 will utilize these funds: [OOSAX, EAFAX], [WHIYX, DSIAX], [NHMAX,MMHAX], and [VFIIX, LEXNX]. Here is the PV link: 

Ultra Low Volatility Strategy: ULVS

Another offshoot of ELVS is what I call the Ultra Low Volatility Strategy [ULVS]. ULVS is a dual momentum model that only uses three bond funds: senior floating-rate bank loan fund [LSFAX], high yield municipal bond fund [NVHAX], and GNMA fund [LEXNX]. These funds were selected because of their extremely low volatility and non-correlation to each other. The table below, taken from Portfolio Visualizer, shows the overall correlation of the assets from 02/01/2013 - 12/21/2018, the annualized return, and the daily, monthly and annualized volatility.  

Name Ticker LSFAX NVHAX LEXNX Annualized Return Daily Standard Deviation Monthly Standard Deviation Annualized Standard Deviation
Loomis Sayles  LSFAX - -0.00 -0.05 3.64% 0.09% 0.84% 2.92%


NVHAX -0.00 - 0.39 3.69% 0.12% 0.89% 3.08%
Voya  LEXNX -0.05 0.39 - 1.43% 0.16% 0.57% 1.98%

Another alternate basket (with slightly higher volatility) is OOSAX, MMHAX and LEXNX.

The timing periods of ULVS are 15-day and 3-month, and the period weighting is on performance, not on ranking. So this is different than most of my other dual momentum strategies that use ranking and not performance to pick the winning fund each month. The weightings are 67% on the 15-day performance (total return) and 33% on the 3-month performance (total return). Only the best performing fund is selected each month. The OOM asset is CASHX, and the top fund must have an overall weighted return greater than CASHX to be bought. Otherwise, the money goes into CASHX ( or Money Market). Maybe Greg can code this strategy into a spreadsheet to help us in the selection process each month.  

Here is the PV link for ULVS: The backtest is quite short: 2014 to present. The summary of backtest results are: CAGR = 7.34%, MaxDD = -0.59%, Worst Year = 4.49%, Monthly Win Rate = 95%. The 2018 YTD return (through December 21st) is 5.24%. 

ULVS can be backtested to 1990 if these funds are used: EBFAX, MMHYX, and LEXNX. The backtest results are: CAGR = 8.28%, MaxDD = -3.80%, Worst Year = 1.30%, and Monthly Win Rate = 82.7%.

Duplicate Fund Version of ULVS: DF_ULVS

Here is the PV link to DP_ULVS: It utilizes the following funds: [EAFAX, LSFAX], [NVHAX, NHMAX], and [VFIIX, LEXNX]. DF_ULVS is a dual momentum strategy with the same timing periods and rank weighting as the original ELVS. The OOM asset is CASHX. The two top-ranked funds are selected each month. Another basket option is [OOSAX, EAFAX], [MMHAX, NHMAX], and [VFIIX, LEXNX]. Backtesting to 1991 can be performed if this basket of funds is used: [EBFAX, BFRAX], [MMHYX, CXHYX], and [VFIIX, LEXNX]. I don't plan on using this strategy, but I thought I would at least show it to you for your consideration.

Vanguard Version of ELVS: VV_ELVS

All of the previous strategies are geared toward Schwab accounts, i.e. using NTF funds at Schwab. Here is the link to the Vanguard version of ELVS: I have tried to use all Vanguard mutual funds in this version, but since Vanguard does not have a senior floating-rate bank loan fund, I had to use OOSAX that is a NTF fund at Vanguard. The timing periods are the same as the original ELVS, but I decided to use the dual momentum model instead of the relative strength model. The reason that the VV_ELVS has lower performance than other Schwab ELVS versions is because the Vanguard funds do not perform as well as other brokerage funds in the same classes. But for a Vanguard account, it is the best I can do.

One of the features I like about Vanguard (and why I continue to have Vanguard accounts) is the ease of trading Vanguard funds. And, secondly, there are no short term redemption fees with Vanguard funds. And, thirdly, you can trade municipal bond funds online in an IRA account. But, I must admit, it is a pain to trade NTF funds at Vanguard because you have to sell the NTF fund on one day and buy another NTF fund on the next day. Plus Vanguard only has a limited number of NTF funds to choose from. Thus, I think a Vanguard strategy of mutual funds needs to be focused on Vanguard funds.

Anyway, VV_ELVS is still a viable strategy for Vanguard accounts, and, for me, it will replace the Vanguard Capital Preservation Strategy [VCPS] that I followed last year. The VCPS did not perform as well in 2018 (+0.13% YTD including EOM distributions), and one of the reasons is because VCVSX was a fund in its basket. VCVSX has about as much volatility as VFINX, and I don't want to own such funds in 2019. So I am switching to VV_ELVS.


Let's now turn our attention to MDBS_ETF that employs bond ETFs. You can find information about this strategy in this article on my SA Instablog. Over time, MDBS_ETF has morphed into a slightly different version than what is presented in the article (as you can see in the comment section of the article).

As a general rule, I prefer bond mutual funds over bond ETFs because of their lower volatility and higher returns, but there are reasons to develop a strategy for bond ETFs, especially if we want to update on a weekly basis. Originally, I conceived a monthly-updated version, but I later switched to a weekly-updated version that I feel is superior in terms of market response and reduced risk. And now at Vanguard there are no commission fees when you buy or sell ETFs, so the only cost to an investor is friction loss (difference between bid and ask prices), and these are minimal with the ETFs I have selected (typically one cent). And the backtests show that there is little difference in results between using week-end prices and next day prices when you trade the ETFs. Thus, it really doesn't matter when (what time of the day) you trade the ETFs on the first day of the week, except I would not trade in the first 30 minutes or last 30 minutes of the market open/close.

The PV link of MDBS_ETF is:

This strategy uses a dual momentum model and three ETFs: municipal bond ETF = HYD, mortgage backed securities ETF = VMBS, and senior floating-rate bank loan ETF = SRLN. The out-of-market [OOM] asset is CASHX (1-3 month T-Bills). The timing periods are 42-days (rankings weighted 51%) and 21 days (rankings weight 49%). At the end of each week, the model selects the top-ranked ETF or CASHX based on the overall rankings of the ETFs and CASHX. This means that CASHX is essentially included with the ETFs in the ranking process. Please note that, in my experience, this strategy can be used in an IRA account even though HYD is a municipal bond ETF. In contrast, ELVS cannot be used in most IRA accounts because municipal bond funds cannot be bought online in IRA accounts at most brokerages. Vanguard is an exception to this rule as I explained previously, i.e. municipal bond funds can be bought in an IRA account at Vanguard.

Backtesting can only be performed back to 2014 because of the historical life of SRLN. The backtest results are: CAGR = 7.1%, MaxDD = -1.1%, and monthly win rate = 78%. The return in 2018 is 4.9% (through December 21st).

This strategy can be backtested to earlier dates by using mutual fund proxies. Here are the mutual fund proxies I used:

1. MMHYX for HYD;

2. VFIIX for VMBS; and

3. EBFAX for SRLN.

The backtest results from 1990 to present are: CAGR = 8.79%, MaxDD = -2.49%, Worst Year = 3.33%, and Monthly Win Rate = 81.6%.

TrendXplorer's VAA-G4 Strategy

I'm not going to go into the details of this strategy, but they can be found on TrendXplorer's website. Everything is well-defined there, including extensive backtest results. I will be using the T=2, B=1 version that has been backtested from December 1970 to June 2017 producing the following results: CAGR = 17.4%, MaxDD = -8.6%, Worst Year = -0.7%, and monthly win rate = 74%. It should be noted that the MaxDD is based on daily data, so this drawdown will be somewhat worse than a MaxDD based on monthly data (like PV does it). 

In some ways, this strategy plays off of Gary Antonacci’s Global Equities Momentum [GEM] Model, better known as his dual momentum model. But the VAA-G4 strategy is much more risk-averse than GEM, while at the same time producing a slightly higher CAGR than GEM. And the TrendXplorer website has a free live signal (go to the Strategy Signals tab). So all you have to do is go to his website after market close at the EOM, and get the selection[s] for the next month. If  you look at the current live signal information, you will see that the 2018 YTD return is 6.37% (through December 21st), and the strategy currently holds IEF, and will probably hold it next month as well. The rolling three-year return is 31.6%. 

Weekly SMA Strategy for LSFAX

I particularly like the senior floating rate bank loan fund LSFAX. The reason I like it is because it has extremely low volatility while having an annual distribution of about 5.6%. Another thing I like about LSFAX is that distributions are only received if you own the fund on ex-div day; this is extremely rare for bond mutual funds. Most bond mutual funds accrue interest on a daily basis, and so adjusted price data are incorrect except at the EOM when the distribution is given to shareholders. Thus, the adjusted price data for LSFAX is accurate on all days, and weekly-updated strategies can be accurately backtested on its data. Another plus for the way LSFAX gives out distributions is that adjusted price data remains constant on ex-div data, i.e. the actual price of the fund drops by the distribution amount, but the adjusted price stays the same. This ends up reducing volatility of the fund.

So, I have developed a weekly SMA strategy for LSFAX. This is based on some of my very early work on VWEHX and HYS (see this article that is, unfortunately, only for SA subscribers and not under my control). At the end of each week, the 35-day simple moving average (using adjusted price data) is calculated and compared with the current price of LSFAX. If the current price of LSFAX is greater than the 35-day SMA, money goes to LSFAX. If not, LSFAX is sold and the money goes to VMBS. Once the 35-day SMA becomes less than the price of LSFAX, VMBS is sold and LSFAX is purchased. VMBS is the OOM asset because of its non-correlation to LSFAX. Please note that if LSFAX has to be purchased too frequently (hitting frequently trading restrictions), we can easily go to EAFAX as a substitute for awhile.  

Here is the PV link to the backtest of this strategy: The backtest only goes back to 2012, but the summary results are: CAGR = 7.04%, MaxDD = -1.03%, Worst Year = 3.73%, and monthly win rate = 88%. The 2018 YTD return (as of December 21st) is 5.2%. The strategy currently holds VMBS. To backtest this strategy to 1990, we can substitute proxies for the two assets in the strategy: EBFAX for LSFAX and VFIIX for VMBS. Here is the PV link for the backtest to 1990: It can be seen that the CAGR = 8.22%, MaxDD = -3.00%, Worst Year = 2.85%, Monthly Win Rate = 90.8%. 

Plans for My Accounts in 2019

As many of you know, in 2018 I had three IRA accounts at Vanguard and five accounts (four taxable accounts and one IRA) at Schwab. So I tried to follow eight tactical strategies in 2018. 

In 2019, in the three Vanguard IRA accounts, I plan on investing in the following strategies:

Account 1. MDBS_ETF;

Account 2. TrendXplorer's VAA-G4 strategy; and

Account 3. VV_ELVS.

The first two strategies are ETF strategies, and I want to take advantage of commission-free ETFs at Vanguard. The third strategy utilizes all Vanguard funds except one [OOSAX], so I am taking advantage of trading Vanguard funds in one day in a Vanguard account. There is also the advantage of trading a tax-free municipal bond fund [VWAHX] in an IRA account online. 

For the four taxable accounts at Schwab, I plan on following the following strategies:

Accounts 1 & 2. DF_ELVS;

Account 3. ULVS; and

Account 4. Weekly SMA Strategy for LSFAX.

For the Schwab IRA account, I still haven't decided what strategy to follow. I am thinking about a SEMPX Strategy (not shown in this article), but I'm not sure yet. But I wanted to get this article posted before Christmas, so I decided to forego my decision on the last account. 

I am dropping a number of strategies I followed last year. These include:

1. Vanguard Balanced Strategy (VBS). I am going to avoid owning VCVSX because of its volatility.

2. Vanguard Volatility Targeting Strategy (VVTS). I am going to avoid large cap equities like VFINX or VOO.

3. Schwab Quarterly Bond Strategy (SQBS) or its monthly version. The quarterly version does not update fast enough for me (it cannot react to market conditions in a timely manner). And even the monthly version utilizes FAGIX, and FAGIX is too volatile for my liking; it actually owns some equities in its holdings.

4. Schwab Monthly Bond Strategy (SMBS). This is being replaced by ULVS.

5. Schwab Improved ELVS-1 (ELVS-1), i.e. the so-called seven-fund version of ELVS. I think DP_ELVS is a much better ELVS version with less risk.

6. Schwab Volatility Targeting Strategy (SVTS). I am going to avoid large cap equities like SCHX in 2019.

7. IOFAX Strategy. I feel IOFAX is too erratic for my liking after owning it for quite a few months. Although IOFAX normally has low volatility on a daily basis, it also has large increases (on the order of 1%) in a single day as well as similar large decreases on a single day. I don't fully understand what causes these sudden jumps, so I don't think it is prudent to invest in such an asset, especially since I don't like volatility.

So there you go. Looking at what I wrote, I guess I have made some rather significant changes for 2019. But I want to invest mainly in low volatility bonds in 2019, and avoid equities and high volatility bond funds like VCVSX and FAGIX.

If I have made any mistakes in this article, please let me know so I can correct them.

Final Thoughts

Best wishes to all my followers who use some or all of my strategies. There is, of course no guarantee if you invest in these tactical strategies; please do your own due diligence and realize you take all responsibility for your investments. I am just providing information that might be useful to you.

I expect 2019 to be a very turbulent year in the market, but I know God is sovereign over all things, and our hope should not be in a stock market, but in the person and work of Jesus Christ for our eternal salvation. On Judgment Day (when Christ returns), we will all have to give an account of ourselves to God. It will not be our good works that save us from God's wrath as many believe, but only the merits of Christ and his perfect righteousness imputed to us if we put our faith in Christ alone for salvation. We are justified (legally declared righteous) by God's grace alone through the instrument of faith alone in the finished work of Christ alone. What a glorious truth found in Scripture, especially at Christmas! Soli Deo Gloria.