Tag: bond market

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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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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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Market Volatility is Back?

Market volatility returned in September 2020. In this post, we discuss this recent surge in the context of long-term historical volatility. We also show how our ETFMathGuy portfolio performed, and elaborate on a source of that performance.

Market Volatility returned, but will it persist?

Earlier this year, we developed an app to automatically measure stock market volatility. This app updates daily, and the figure below shows the latest result.

Stock Market Volatility was 19.7% on Friday, slightly above its long-term historical norm.
Stock Market Volatility was 19.7% on Friday, slightly above its long-term historical norm.

We also provided a table showing the distribution of long-term historical volatility, as observed over more than 20 years. Current volatility is 19.7% as of October 2nd, which corresponds to the upper limit of the third-quartile. So, while market volatility returned, it is still well below the volatility seen in early 2020.

Market Performance through the 3rd Quarter

The higher volatility occurring in September did indeed correspond to a loss in the stock and bond markets. The stock market lost 3.7% and the bond market lost 0.1%, based on the ETFs with ticker symbols IVV and AGG. The year to date return of these stock and bond index ETFs were 5.5% and 6.7%, respectively, including dividends. The year to date return of the ETFMathGuy Aggressive Risk Portfolio was 20.8%. This return is the result of trades conducted in a brokerage account at Fidelity Investments, and so includes the bid-ask spread.

Stock and Bond Market YTD Returns compared to the ETFMathGuy Aggressive Risk Portfolio
Stock and Bond Market YTD Returns compared to the ETFMathGuy Aggressive Risk Portfolio

Premium subscribers now have access to the October 2020 premium portfolios, as well as a handy rebalancing calculator. Free subscribers are welcome to log in to review older premium portfolios through May 2020, or upgrade their account to enable premium access.

Sources of Excess Performance

One ETF that our portfolios have consistently included throughout this year is the Aberdeen Standard Physical Palladium Shares ETF (ticker: PALL). Its 12 month return and volatility appear below next to the S&P 500 ETF (ticker IVV).

The Palladium ETF has higher volatility than the S&P 500, but also has a higher return over the last 12 months. Source: www.ETFreplay.com
The Palladium ETF has higher volatility than the S&P 500, but also has a higher return over the last 12 months. Source: www.ETFreplay.com

Examining these results for PALL confirms the expectation that higher risk can lead to a higher return. Our optimal portfolio construction process creates a portfolio that, along with PALL, finds other ETFs that maximize expected return. This process also keeps the portfolio’s expected risk between the stock and bond markets. Additionally, we backtested this process over a full market cycle. We hope you will consider upgrading your subscription to gain insights into a wider variety of ETFs that appear in our efficient portfolios.

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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Retirement income tax

Anyone receiving a regular paycheck is familiar with income tax since it usually appears between the “gross” and “net” income of your pay stubs. In retirement, you will likely have many sources of “retirement income”, and consequently incur “retirement income tax”. In this post, we discuss some typical sources of retirement income tax, and how they interact with one another.

Note:  This post has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

Guaranteed Retirement Income

Social Security is one of the most common sources of retirement income. It adjusts for inflation each year, so this benefit rises with the cost of living. Another less common source of guaranteed retirement income is a pension. These guaranteed income sources often give the retiree the choice to decide when benefits begin. They also may allow a deferral of benefits until a later age.

Now, if your total income is sufficiently low, pension and social security income could yield no tax liability. Otherwise, retirees incur tax on this guaranteed income as ordinary income.

Retirement income often is the combination of a number of sources.
Retirement income often is the combination of a number of sources.

Dividends, Interest and Coupon Payments

If you have a savings or taxable brokerage account with stocks, bonds, ETFs, mutual funds or other interest bearing investments, you may receive regular payments. As we discussed in our previous post on taxation, these payments are either taxed as ordinary income or capital gains.

Your “Nest Egg” Accounts

Individual Retirement Accounts (IRAs), 401(k)s, 403(b)s and 457 plans all provide tax-deferred growth. Since we usually fund these accounts with pre-tax money, the IRS taxes qualified distributions as ordinary income. Alternatively, we fund Roth IRAs, Roth 401(k)s and Roth 403(b)s with after-tax money, so we receive qualified distributions tax free. Lastly, if we sell stock or bond ETFs for a gain within a taxable brokerage account that were held for more than one year, taxes incurred are usually at the preferred capital gains rates.

Big Picture

All these sources may sound confusing, and may not apply to all retirees. But, putting these retirement income sources into a conceptual model can help you better understand how they affect a retiree’s annual tax liability. In the model below, we assume that all taxable brokerage accounts have a mix of dividend paying stock and bond ETFs. We show capital gains and qualified dividends above sources of ordinary income, since more ordinary income can push capital gain tax rates to higher brackets.

Retirement Income Sources and Taxation Model by ETFMathGuy’s Optimal Retirement Income Calculator

Using your nest egg efficiently can significantly improve both portfolio longevity and funds bequeathed to your heirs. Based on award winning research, we implemented this model into a free web application. We update the model’s algorithms regularly, so please try out this tool and send us your feedback on features you may want included in the future!

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 Mid-year Review by ETFMathGuy

The coronavirus pandemic has made for an interesting year so far in the financial markets. So, we chose to focus this post on a 2020 mid-year review of market volatility and returns.

Let’s begin by looking at the stock (equity) and bond (debt) markets. The time series below shows the significant volatility in both markets. The green line is the total return of the iShares Core S&P 500 ETF (ticker: IVV). The blue line is the total return of the iShares Core U.S. Aggregate Bond ETF (ticker: AGG). Notable, for the second quarter of the year, the S&P 500 had its biggest return since 1998. Unfortunately, the S&P 500 total return (including dividends) is still down for the year.

Year-to-Date Returns

The year-to-date total returns for the stock and bond market appear in the next figure. Alongside them, you can see the total returns of the ETFMathGuy Moderate and Aggressive portfolios. We found these portfolio returns by reviewing my account balances, so they represent returns that include portfolio turnover and the bid-ask spread from actual trades. However, they do not include the effect of taxes. Like many individual investors, I won’t file my 2020 returns until early next year.

Both portfolios continued to outperform the total return of the S&P 500. Premium subscribers can now access the July 2020 portfolios. Free subscribers are invited to review previous month portfolios. We also encourage free subscribers to upgrade their subscriptions to enable access to the portfolios built from the latest market dynamics.

Year-to-date returns through June 2020 for the stock market, bond market and ETFMathGuy Portfolios

Market Volatility

Stock market volatility continues to trend down, but is still higher than historical norms. Current volatility is 27.7% using our market volatility calculator that updates daily. Thus, over the last month, the volatility has come down from the 96th percentile to the 90th percentile, based on historical norms.

Stock market volatility continues to trend down, but still higher than historical norms.

We interpret this lower volatility as the markets reaction to less uncertainty about future economic growth. But, as the chart shows, we are still in a time of elevated uncertainty.

We hope you find this 2020 mid-year review educational as your consider your investments in the second-half of 2020.

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 Volatility Continues to Decline

Declining market volatility continued in the month of May. Also, the S&P 500 had a very good month, returning 4.8%. However, the broad-based index is still down 5.0% for the year, including dividends. The chart below updates the returns from last month for returns through May 29, 2020. As these results show, the ETFMathGuy Moderate and Aggressive portfolios continued to outperform the S&P 500. The premium portfolios for April and May 2020 are now available to all subscribers. The latest premium portfolios for June 2020 are available to paid subscribers.

Year-to-date returns through May 2020 for the stock market, bond market and ETFMathGuy Portfolios
Year-to-date returns through May 2020 for the stock market, bond market and ETFMathGuy Portfolios

Markets returning to normal?

The declining market volatility suggests that the fear in the markets continued to subside in May. However, they are still elevated above their long-term historical average. The image below shows the volatility from our daily monitor that tracks the S&P 500 ETF (ticker: IVV). We determine the standard deviation of daily returns over one, two and three month periods, and report an average to find a daily value. As of Friday, May 29th, volatility was 37.8%, as shown below.

Stock market volatility is still high, be is now well below its recent peak over 70%.
Stock market volatility is still high, be is now well below its recent peak over 70%.

Market Volatility Still Higher than Normal

Analyzing over 5,000 trading days since mid-June 2000, we can see how “out of the norm” current volatility really is. The table below shows the distribution of volatility over this nearly 20-year time period. As this table shows, we are still in the 96 percentile of volatility, meaning only 4% of the days since mid-June 2000 exhibited higher volatility then on May 29th, 2020.

Stock market volatility is still very high, by historical standards.

Stock markets returning to “normal” can be very subjective. The table above can provide a more objective perspective to such an assessment. However, if the downward trend continues, it may not take much longer before volatility returns to its long term historical norm.

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.
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Diversification and February 2020 returns

The stock market experienced a significant drop in the month of February 2020. But, the bond market had a positive total return for the month. In this post, we discuss the benefits of a diversified portfolio during times of market stress, like seen in the February 2020 returns.

A big economic shock

Market returns for the the month of February 2020 were significantly impacted by the corona virus outbreak affecting the global economy. The S&P 500 index ETF (ticker: IVV) lost 8.5% in the month, but the iShares Core U.S. Aggregate Bond ETF (ticker: AGG) gained 1.6%. The stock market appears to be pricing in reduced earnings growth, due to the virus outbreak. Consequently, stock market sellers have rotated their investments into the bond market. Increased demand for bonds is driving up prices, and consequently returns, from bond investments.

The graphic below shows the total returns for the stock market, bond market, and two other portfolios for February, 2020.

Stock, bond and other portfolio returns in February 2020

Using a diversified portfolio and February 2020 returns

In hindsight, the bond market offered a higher return in February 2020. But, exclusively investing in bonds eliminates the possibility of the significant upside potential of the stock market, such as the 31.3% of the stock market in 2019.

One approach to managing risk while realizing some additional return is to invest in a 50% stock and 50% bond portfolio. For February 2020, this would have led to a 3.4% loss. However, wider diversification beyond the mainstream stock and bond markets offered a more substantial benefit. Specifically, the ETFMathGuy’s moderate risk portfolio (shown in a previous post) appears below. It returned 0.1% in February 2020, and was designed to match the volatility of the 50% stock and 50% bond portfolio.

The January ETFMathGuy moderate risk portfolio for taxable accounts.

The additional return comes from our optimal portfolio construction. ETFMathGuy portfolios diversify across other asset and sub-asset classes beyond stocks and bonds using a quantitative methodology. For instance, the portfolio above contains municipal bonds, commodity and tech sector exposure, among others. This diversified exposure has been very favorable to returns so far in 2020. But, market conditions are very dynamic. So, if you are looking for ideas on how to improve your portfolio’s diversification, please check out our current free and premium portfolios, constructed using the latest market data.