Tag: backtesting

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Future tax uncertainty

The economic stimulus signed this past week by President Biden has many investors wondering if taxes may change in the future. So here, we discuss the possibility of future tax uncertainty. We also show you how to assess this uncertainty in your retirement income plan using an upgrade to our optimal retirement calculator.

$1.9T of economic stimulus

On March 11, 2021, President Biden signed the $1.9T stimulus package. There are many elements to this aid package, including how it will be paid. However, the level of debt held by the U.S. government continues to grow relative to total economic output, as measured by Gross Domestic Product (GDP). One simple solution to reducing this debt burden is to increase individual and/or corporate taxes. And, in 2026, the Tax Cuts and Jobs Act (TCJA) expires. So, what plans should an individual investor be making today if tax rates change significantly in the coming years?

Our optimal retirement income calculator now models tax uncertainty

Since we don’t know what the U.S. Congress will decide in 2026, nor what a future president may sign into law, future tax uncertainty is important for retirement planning. To this end, we recently upgraded our optimal retirement calculator to include this future uncertainty.

Now, under section “Other tax-related information“, you will see two inputs to model this uncertainty. First, there is new input for a percent increase or decrease of future income and capital gains tax rates after the TCJA expires. The 2nd entry is the year this higher or lower rate will occur. The default input values assume that the TCJA will be extended throughout your retirement horizon.

Future tax uncertainty inputs for optimal retirement income planning. Source: app.etfmathguy.com
Future tax uncertainty inputs for optimal retirement income planning. Source: app.etfmathguy.com

A simple example of rising tax rates on a retirement income plan

So, what happens if tax rates increase by 20% in 2026? A retiree using the Common Rule strategy can expect their bequest to shrink by about $92,000, from $1.227M to $1.135M. However, the Optimal Rule only expects to shrink the inheritance by about $36,000, from $1.638M to 1.602M.

What can we conclude from this? First, and most obviously, higher tax rates will reduce an heir’s inheritance. But, more importantly, optimal drawdown strategies become even more important when tax rates rise, since there is more of an opportunity for tax efficiencies.

Acknowledgments

We would like to thank Mr. Phil DeMuth at Conservative Wealth Management LLC for suggesting upgrading our calculator to include future tax uncertainty. Additionally, we wish to thank Mr. Noah Beecher at Cipolla Financial & Insurance Services for noting a discrepancy in our calculator’s pension income, which has now been corrected. For the many others who have sent us suggestions on other improvements to our online calculator, please stand by. More enhancements will be appearing in the coming months. Thank you for your suggestions and your patience!

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
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Bond Markets Fell in February 2021

ETFMathGuy optimal portfolios are now available to free and premium subscribers. Please log-in to see them now. In this post, we discuss how the bond markets fell with rising interest rates this past month, and its effect on the stock market and our ETF portfolios.

Bond markets fell. What is happening with interest rates?

The recent reaction of the bond markets appears to be due to investors being less convinced that U.S. Government interest rates will remain low for the long-term. Based on recent Wall Street Journal reporting, demand for the 10-year U.S. Treasury note has been “tepid”. With lesser demand come lower prices to stimulate buying. And, when prices go down in a bond, its interest rate goes up. How so? One simple way to think about this relationship is from the bond seller’s perspective. If the demand for bonds goes up, the bond seller can set a lower fixed interest rate and still find a buyer. Conversely, the bond seller must provide higher fixed interest rates, thereby compensating the bond investor more, if demand is low. If all this sounds confusing, please take a look at the nice visual representation below.

The seesaw relationship between bond prices and interest rates. Source: Securities & Exchange Commission
The seesaw relationship between bond prices and interest rates. Source: Securities & Exchange Commission

Why is demand low for U.S. Government bonds?

The most obvious explanation for the low demand for bonds is the large amount of debt the U.S. Government is expected to sell to fund the ongoing stimulus efforts. One measurable effect of this stimulus is to continue to keep the U.S.’s debt-to-GDP ratio above 100%. Servicing this debt will slowly become more expensive as interest rates rise.

How did ETFMathGuy Premium Portfolios do in February 2021?

Our portfolios gave back some of their gains in January, in part due to the increased chance that interest rates may be on the rise, increasing corporate borrowing costs. The chart below shows the year-to-date returns of stocks, bonds, and ETFMathGuy premium portfolios held at Fidelity and Schwab. Notice how the low demand for bonds has reduced the total return for the iShares Core U.S. Aggregate Bond ETF (ticker: AGG).

Total returns for ETFMathGuy premium portfolios for January and Februrary, 2021

We hope this post provided you with some helpful perspectives on why the bond markets fell, and how the stock market, ETFs, and the overall economy are all dependent on one another.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
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Concentrated exposure with thematic ETFs

In our recent post about thematic ETFs, we discussed the growth of so-called “thematic ETFs”. These are ETFs that follow a theme. One of our favorite writers at the WSJ is Jason Zweig, and he also wrote about these ETFs recently. Today, they represent some of the market’s hottest funds by using concentrated exposure.

“Often called thematic ETFs, these funds cut across industries, trying to capitalize on ideas like alternative energy, cloud computing or 3-D printing. Others buy stocks that could benefit as more people work from home, demand gender or racial diversity, or lavish money on their pets.”

Jason Zweig, The Intelligent Investor, Wall Street Journal, January 15, 2021

More Concentrated Exposure

By concentrating on a particular theme, like solar power, robotics or industrial innovation, many of these funds can have very high returns. For example, the Invesco Solar ETF (ticker: TAN) had a 234% return in 2020. Similarly, the ARK Innovation ETF (ticker: ARKK) returned 153%. Of course, these returns didn’t come without their own risks. The volatility of these two thematic ETFs were 55% and 49%, respectively. As a basis of comparison, our typical benchmark for stocks is the iShares Core S&P 500 ETF (ticker: IVV) and bonds is the iShares Core Total US Bond ETF (ticker: AGG). The 2020 return of these ETFs appears below at 18.4% and 7.5%, respectively. Also, note their lower volatility than the thematic ETFs mentioned here.

Risk and Return of Three popular thematic ETFs in 2020. Source: etfreplay.com/charts.aspx
Risk and return of three popular thematic ETFs and two broad-based ETFs in 2020. Source: etfreplay.com/charts.aspx

Higher expenses in thematic ETFs

Expense ratios are often much higher in thematic ETFs than broad-market ETFs like those that track the S&P 500. For instance, the three thematic ETFs from above have expense ratios of 0.69%, 0.95% and 0.75% according to ETF.com. In contrast, our stock and bond benchmark ETFs (tickers IVV and AGG) have expense ratios of 0.04% and 0.06%. So, investors must pay a premium to get unique exposure to these themes. And, until a thematic ETF grows sufficiently, the bid-ask spread on them could be much larger, further degrading returns when they are bought and sold frequently. Nevertheless, we found in 2020 that thematic ETFs, when built into a diversified portfolio, can both manage risk and boost returns.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
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2020 Year In Review

Happy New Year from ETFMathGuy! In this post, we conduct a 2020 year in review of stock, bond and ETFMathGuy premium portfolios.

For many, 2020 was an unusual year in the investing world. And, investing in ETFs was no exception. In our first post of 2020, we discussed how we adapted to the new normal of nearly all ETFs trading commission free. That opened our portfolio construction process to consider over 2,000 ETFs. But, as we noted in another post from 2020, we immediately exclude any ETF with under $50 M in assets, which helps an investor avoid ETFs that may soon close, as well as larger bid-ask spreads when traded.

So, how did ETFMathGuy portfolios fare in 2020?

In short, we have been very satisfied with our ETFMathGuy premium portfolios. Our goal was to achieve returns similar to the S&P 500, but at lower risk. We established this goal based on rigorous backtesting all ETFs that were previously commission-free from Fidelity, or slightly less than 500 ETFs. However, in 2020, we expanded into all commission-free ETFs, and the returns from two real accounts at Fidelity appear below.

Total returns for stock market, bond market and two ETFMathGuy portfolios for 2020
Total returns for stock market, bond market and two ETFMathGuy portfolios for 2020

Clearly, we achieved our 1st goal of generating returns “at least as good” as the stock market, which we assume as the S&P 500. These returns were possible thanks to our model’s ability to dynamically adjust to market conditions. For subscribers with free memberships, you can see what these ETFs were by logging into your account, and browsing the 2020 portfolios through June 2020. For example, PALL and ARKK have been consistent components of our optimal portfolios. If you are a current premium subscribers, your January 2021 portfolios and rebalancing calculator are now available for your consideration.

But, what about risk in our 2020 year in review?

The pandemic of 2020 had a substantial impact on market risk. When measured monthly, stock market volatility was 25.8%. Examining the monthly returns for our ETFMathGuy portfolios, we observed an 18.1% and 19.4% and volatility for our moderate and aggressive portfolios, respectively. So, we also achieved our 2nd goal of keeping volatility lower than the stock market. We also revisited our calculation of Alpha and Beta. For the 12-monthly returns in 2020, we found Alpha = 2.48% and Beta = 0.49. Their p-values were 0.09 and 0.02, respectively for the ETFMathGuy aggressive portfolio.  Recall from this post that the smaller the p-values, the greater confidence we have that these are the correct values and have minimal estimation error. So, for those of you “seeking alpha”, these statistics indicate our portfolios likely produced “alpha” in 2020.

Our statistics on 2020 monthly returns indicated that we likely produced "alpha" in our ETFMathGuy aggressive portfolios.
Our statistics on 2020 monthly returns indicated that we likely produced “alpha” in our ETFMathGuy aggressive portfolios.

Forecasting 2021?

We won’t venture a guess at what the markets have in store for investors in 2021. Frankly, there are many, many articles already written on this topic. Instead, we will continue to pursue our goal to construct ETF portfolios that meet or exceed returns like the S&P 500 with lower volatility. If you are interested in accessing the January 2021 premium portfolios, please consider upgrading your membership now at 2020 subscription prices. In the coming weeks, we plan to increase our subscription prices for the new year. Please contact us if you would like a free sample of our latest premium portfolio.

We hope you found this 2020 year in review educational!

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
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What are Model Portfolios?

Yesterday’s Wall Street Journal had a very interesting article about model portfolios. So, what are these, and why should an individual investor care about them?

A Wall Street Trend

This WSJ article stated that the use of model portfolios is a growing trend, since it helps take the emotion out of investing. So, these portfolios are based on scientific observations and analysis, rather than an investor’s “instincts” or emotional reaction to current market conditions. A growing number of financial advisors are embracing their use too.

Model portfolios take some of the human emotion out of investing. They provide the comfort of science.

Andrew Guillette, Research Director at Broadridge. source: WSJ, December 4, 2020

Thus, these model portfolios are ones that can “dynamically shift the funds it invests in as markets change”. We are advocates of this approach using commission-free ETFs. Our free and premium portfolios do exactly that, as we update them each month based on current market conditions. Please log in to see these portfolios now, which include the latest market shifts through Friday, December 4th. Premium subscribers also have access to a handy web calculator to assist in rebalancing their portfolio.

How have model portfolios performed this year?

Unfortunately, little is published about model portfolio performance. But, we report our model’s performance for ETFMathGuy portfolios on a regular basis. The image below shows the total returns from January through end of November from our investments at our Fidelity brokerage account.

Total returns from January through November of Stocks, Bonds and ETFMathGuy Portfolios

What about risk?

The performance over the last 11 months look very promising, suggesting a scientific approach to rebalancing an ETF portfolio can perform well in volatile markets. But, how much risk did we take with these investments? Using the monthly returns that led to the total returns shown above, the volatility of the stock market (ticker: IVV) was 26.9%. However, the volatility of the moderate risk ETFMathGuy portfolio was only 18.2%. Not surprisingly, the aggressive risk ETFMathGuy portfolio had a higher volatility of 19.0%, as expected for a portfolio seeking more risk. So, these portfolios continue to outperform the stock market, while also taking less risk as measured by volatility.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.

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Thematic ETFs continue to grow

Thematic ETFs continue to grow in popularity. But, how is this type of ETF different from the broad-based ETFs, like those that track the S&P 500? In this post, we discuss several points to consider when investing in thematic ETFs.

What is an ETF “theme”?

ETF themes can come from nearly anywhere in the investment world. As discussed in this recent WSJ article, themes are often found to hopefully align with “beliefs or interests” that investors may have. In the U.S., assets invested in thematic ETFs have doubled in the past three years. However, there have been quite a few closures along the way too. Closures are typically due to the ETF’s expense ratio failing to produce sufficient revenue to match the expense of running the ETF. This WSJ article suggests that ETFs without $50M in assets after three years are most vulnerable.

We agree. In fact, the initial evaluation of the ETFs we use in our portfolio construction process discards ETFs that haven’t existed for several years or have less than $50M under management. Our approach helps avoid the many issues associated with ETF closures.

Opportunities of Thematic ETFs

The obvious attraction of these ETFs is their opportunity to make more “concentrated” investments in companies within its theme. For example, investors interested in companies involved in automation could buy the ROBO Global Robotics and Automation Index ETF (ticker: ROBO). Or, if an investor wishes to make investments in solar companies, they can buy the Invesco Solar ETF (ticker: TAN). The image below shows the top ten holdings of this solar ETF.

Top 10 Holdings of the Invesco Solar ETF. Source: ETF.com
Top 10 Holdings of the Invesco Solar ETF. Source: ETF.com

However, theme-based ETFs also lack diversification inherent in broad-based ETFs like iShares Core S&P 500 ETF (ticker IVV). And, they are typically are less liquid. For instance, the average bid-ask spread of the Invesco Solar ETF was 0.11%. The iShares Core S&P 500 ETF bid-ask spread was much lower, at 0.01%, according to ETF.com.

Risks and Rewards of Thematic ETFs

Having more concentrated holdings than a broad-based index usually means higher risk. The chart below shows how the risk, measured by volatility, for the automation and solar ETFs compare to the S&P 500 ETF over the last three years. Clearly, these thematic ETFs exhibited greater risk. For the solar ETF, this higher risk level was compensated by a higher total return. However, the automation ETF’s higher risk levels didn’t produce returns higher than the S&P 500, lagging it by about 1% a year.

Three-year risk and return of the Invesco Solar ETF, ROBO Global Robotics and Automation Index ETF and the iShares Core S&P 500 ETF. source: www.etfreplay.com
Three-year risk and return of the Invesco Solar ETF, ROBO Global Robotics and Automation Index ETF and the iShares Core S&P 500 ETF. source: www.etfreplay.com
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
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Market uncertainty prior to next week’s election

The stock market, measured by the S&P 500, lost about 2.5% in October. But, earlier in the month, the stock market was up over 5%. The chart below shows the roller coaster ride for two ETFs that track the stock and bond markets: iShares Core S&P 500 ETF (ticker IVV), Vanguard Total Bond Market ETF (ticker: BND) So, what’s going on with this market volatility?

Stock and bond returns in October, 2020. Source: finance.yahoo.com

Markets don’t like uncertainty

There are many opinions to describe what caused the financial markets to move like they did in October 2020. We think that the combination of the upcoming election and spike in coronavirus cases is adding to uncertainty. But, this uncertainty, as measured by stock market volatility, is still well below where it was earlier in the year. We used our daily volatility monitor in the plot below.

Stock market volatility as of October 30, 2020. Source: ETFMathGuy.com
Stock market volatility as of October 30, 2020. Source: ETFMathGuy.com

As this chart shows, volatility has crept a little higher in October. But, based on the long-term historical norm, this volatility is still slightly elevated in the 75% percentile. Of course, if you are a believer in efficient markets, then you simply don’t know what the future of the market will hold. In more positive news, the WSJ recently reported that the U.S. economy recovered significantly in the 3rd quarter of 2020. Consumer spending for online retail items continue to stay strong, while the travel sector still lags.

How about the ETFMathGuy portfolios and market uncertainty?

Thanks to wide diversification from over 2,000 ETFs we analyze each month, our portfolios continue to perform well. Consequently, the moderate risk portfolio lost 0.6% and the aggressive risk portfolio lost 0.5% in October. The year to date cumulative return of the ETFMathGuy aggressive risk portfolio appears below, along with the S&P 500 and Aggregate Bond Market total return.

ETFMathGuy year to date cumulative returns, versus the S&P 500 and Aggregate Bond Market returns.

Premium subscribers can now access the backtested portfolios for November 2020. Not a premium subscriber yet? Then, just visit the bottom of our “Join Us” page to upgrade your subscription and get immediate access!

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
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Can minimum volatility ETFs consistently perform well?

Last weekend, there was a fascinating article about minimum volatility ETFs. It was written by one of my favorite Wall Street Journal columnists, Jason Zweig. In this article, he shared a lot of wisdom, which I will highlight more here.

What is a minimum volatility ETF?

One of the most common ways to measure risk in an ETF is to track its volatility. So, investing in a minimum volatility ETF may make sense for investors seeking to reduce risk. One of the largest low volatility ETFs is the iShares MSCI USA Min Vol Factor ETF (ticker: USMV), with over $30B in assets. The chart below shows it performance since its inception in October 2011, which generally lagged the S&P 500 (ticker: IVV). However, its volatility was noticably lower.

Risk and Return of a large minimum volatility ETF compared to the S&P 500 . Source: www.ETFReplay.com
Risk and Return of a large minimum volatility ETF compared to the S&P 500 . Source: www.ETFReplay.com

Why did this ETF produce lower risk and lower return?

This ETF is able to lower risk through the use of optimization, much like the ETFMathGuy portfolios. However, we don’t limit our optimal portfolios to equities like minimum volatility ETFs. We consider bonds, commodities and other alternative investments too. ETFMathGuy also uses backtesting that includes transaction costs to build portfolios to maximize returns.

The fund’s index uses an optimization algorithm to build a “minimum variance” portfolio—one that considers correlation between stocks—rather than simply holding a basket of low-vol stocks…

USMV Factset Analytics Insight (https://www.etf.com/USMV)

So, this ETF consists of stocks which typically emphasize lower volatility sectors like financial, utilities and real estate. These sectors are often termed “value”, rather than “growth” investments, in part due their issuance of dividends. Consequently, optimization to produce a minimum volatility ETF removes some market risk, generating a beta of 0.87. But, as we can see in the economic cycle from 2011 – 2020, the return also lagged the market.

Recent performance of minimum volatility

This year’s pandemic has certainly affected the stock market in significant ways. Investments favored by minimum volatility ETFs (financials, utilities, and real estate) have been significantly impacted by coronavirus lockdowns. However, technology has done very well, as remote work has increased the demand for technology systems and services. Unfortunately, technology is typically more of a “growth” investment. So, minimum volatility ETFs often limit their exposure to growth stocks to reduce volatility. In the ETFMathGuy portfolios, technology has been a noticeable portion this year, and has led to encouraging year-to-date returns and performance statistics.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
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Alpha and Beta Portfolio Statistics

In this post, we will be diving deeper into two commonly used portfolio statistics. These terms are Alpha and Beta, are based on a statistical method called “Regression“, and are used in the Capital Asset Pricing Model (CAPM). They are calculated by fitting a “line” to a set of points.

“…alpha is the return on an investment that is not a result of general movement in the greater market”.

Description of “Alpha” from the Capital Asset Pricing Model (CAPM). Source: Investopedia

“Beta effectively describes the activity of a security’s returns as it responds to swings in the market”

Description of “Beta” from the Capital Asset Pricing Model (CAPM). Source: Investopedia

If we define the market as the S&P 500, then Beta is an indication on how sensitive a portfolio is to S&P 500 returns. Alpha indicates how returns occur independent of the S&P 500. The term Alpha is so important, that it has even spawned its own website. And, why not? It represents the return obtained without exposing an investor to (stock) market risk.

An Example of CAPM

To better illustrate how Alpha and Beta are determined, consider the last 8 months of returns for the the following data sets:

  1. ETFMathGuy Aggressive Portfolio Returns
  2. S&P 500 total returns (ticker: IVV) to represent the market
  3. Short-term U.S. Treasury bill returns (ticker: SHV) to represent the risk free rate

Since CAPM is based on the concept of “excess returns”, which are returns above the risk-free rate, we can visualize this relationship in a scatterplot. The horizontal axis is the “Market Returns – Risk Free Rate”, and the vertical axis is the return of our “ETFMathGuy Aggressive Risk Portfolio Returns – Risk Free Rate”.

The Capital Asset Pricing Model (CAPM) applied to 8 months of returns of ETFMathGuy Portfolios
The Capital Asset Pricing Model (CAPM) applied to 8 months of returns of ETFMathGuy Portfolios

These results look promising, with a value of Beta = 0.37 and Alpha = 2.1%. However, 8 observations are small, so analysts typically look to see if these values are “significantly different” than 0. Or, put another way, what is the chance that these value were obtained by skill, rather than luck?

Assessing Luck vs. Skill

More data or evidence is always helpful in supporting any claim using statistics. For the example we show above, we are claiming that Alpha and Beta are non-zero values. Using some fundamentals from statistics, we can determine p-values for our Alpha and Beta calculation above as 29% and 15%, respectively. (Yes, p-value is another statistical term.) These p-values are fairly easy to interpret. In this case, 29% is the probability that Alpha = 2.1% is due to random chance, and the 15% is the probability that Beta= 0.37 is due to random chance. Put another way, we can say that Alpha = 2.1% and Beta = 0.37, but there is a chance (29% and 15%) that, in fact, we are wrong and that these value should be zero. So, the smaller the p-values, the greater confidence we have that these are the correct values and have minimal estimation error.

So What?

These results show that the ETFMathGuy Aggressive Portfolio is generating positive Alpha, and isn’t overly sensitive to the market. However, more data is needed to provide stronger evidence that these results are not simply due to luck. We hope you will continue to check back to see how the ETFMathGuy portfolios perform for the rest of 2020. And, for those who are premium subscribers, the September portfolios are now available, which includes a new calculator at the bottom of the page to further aid in portfolio re-balancing decisions.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
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S&P 500 down about 20% in the First Quarter of 2020

It was a difficult year so far for many investors. The total return of the iShares Core S&P 500 ETF (ticker: IVV) was -12.1% for the month of March. The total return of IVV in the first quarter 2020 was -19.6%. Such large losses often shake investor confidence. Also, the math is against you now. To recover from the 20% loss, a investor needs a 25% gain. If losses hit 40%, then an investor needs a 67% return to get back to where they started. And, if losses reach 50%, an investor needs a 100% return, or double their money, to recover all their losses. This is the unfortunate math behind compounded gains and losses.

The recovering from a large market loss can be challenging due to the effect of compounding
Recovering from a large market loss can be challenging due to the effect of compounding

How did the ETFMathGuy portfolios do in First Quarter 2020?

Using my account balances at the end of March, I measured my investment returns for the first quarter. For the Moderate Portfolio in my taxable account, my first quarter return was -5.0%. My Roth IRA used the Aggressive Portfolio and had a first quarter return of -2.1%. These returns far exceeded the S&P 500 in this first quarter. So, we are pleased with these results, which were supported by the backtesting we used to tune our optimization methodology.

Total Returns for the First Quarter Using Taxable and IRA Accounts
Total Returns for the First Quarter Using Taxable and IRA Accounts

Why is there such a large difference between the moderate and aggressive portfolios? The biggest driver was the moderate portfolio’s exposure to the municipal bond market. The aggressive portfolio did not include municipal bond ETFs, since it operated within an IRA. Please, look for yourself at the premium portfolios that produced these returns, which are now available to all free subscribers.

Measuring Volatility

We’ve added a new feature to the ETFMathGuy site to track the daily stock market volatility. Using the first ETF ever created, the SPDR S&P 500 ETF Trust, we developed an average of one, two and three month annualized volatility. At the end of this week, volatility was 70.6%, which is well above its median value of about 13% over the last 20 years.

Current stock market volatility hasn't been seen since the financial crisis of 2008.
Current stock market volatility hasn’t been seen since the financial crisis of 2008. Click this image to see the latest volatility, updated daily.

The last time volatility reached this level was the 2008 financial crisis. Then, volatility peaked at 77.8% on November 24, 2008.

In our next post, we will discuss using volatility to potentially detect market trends. Before then, you may want to read this article on on tips for investors in volatile markets.

ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.
ETFMathGuy is a subscription-based education service for investors interested in using commission-free ETFs in efficient portfolios.