The Meta Strategy ETF Portfolio
monthly issue #20, August 2020
Dear Subscriber,
the Meta Strategy indicators signaled the change to a bull market regime on July 10th while the world still is in turmoil all around us. This is quite normal due to the anticipatory nature of the stock market and fundamental economic improvement is lagging behind. During the month the signal was confirmed and we can now carefully buy back into equities.
Our gold position had one of its best months in history (up 13,54%) – far surpassing the gains of the S&P 500 – and I am quite happy to make changes to my long-term portfolio slowly and gradually.
Until we get a clearer picture whether the economic recovery is sustainable in the face of increasing Coronavirus infection rates around the world, I will keep half of my portfolio in gold for some time to come and use no leverage in the aggressive ETF portfolio. Often gold performs as well as stocks in the early stages after severe economic troubles and the asset will keep us diversified should the economy run into unanticipated problems.
Volatility is still elevated and sharp pullbacks may happen at any time coming out of such severe market turbulences.
Best of luck to you all!
sincerely
David Steets
You can find all recent editions in the Member Area or the pre-04-2020 newsletter archive, including a FAQ section, here.
Portfolio changes
| Defensive ETF portfolio | sell 50% Gold ETF (hold 50% Gold); buy 50% S&P 500 ETF |
| Aggressive ETF portfolio | buy 50% S&P 500 ETF; hold 50% Gold ETF |
Background
The Meta Strategy uses systematic fundamental and technical inputs to gradually rotate a portfolio between different asset classes according to market conditions. It is invested in stocks by default, because they return more than other financial assets (for example bonds, real estate or commodities) over the long term. A traffic light model, that judges the health of the economy and the stock market, determines how much of the portfolio is allocated to these risky assets and when to move to safe or alternative assets to protect against the risk of losses.
Find out more details about the Meta Strategy here (oder hier auf deutsch).
I run two model portfolios suited either for normal or more aggressive investors. Both portfolios use the same signals, but invest in different exchange traded funds (ETF) that cover broad markets.
| Defensive ETF portfolio characteristics | long only |
| Aggressive ETF portfolio characteristics | leveraged long and short |
The defensive portfolio aims to earn the same return as the stock market, but with only half the maximum losses from the peaks over the long term.
The aggressive portfolio, for investors who can stomach the risk of drawdowns as high as we have seen in the stock market in the past as well as higher short-term fluctuations, aims for returns that beat the stock market over the long term.
Using leveraged ETF will magnify the daily move of the underlying index by the leverage factor. Short (or inverse) ETF will return the opposite of the index every day – this causes a rise in the value of the fund in a falling market and allows us to profit in prolonged bear markets.
Scroll down to the bottom of the newsletter to see the returns of the model portfolios since inception and a historical performance backtest.
Current indicator status
What does the current market environment tell us?
| Fundamental indicators | RED warning since April 2020 |
| Technical indicators | Green light for re-entry into stocks on July 10th. |
Systematic indicators based on the price of the the US stock market and the state of the US economy, as the dominant driver of asset prices worldwide, define my assessment of the market environment. See here for detailed rules on how these indicators are used to generate the current status.
Thoughts on the market environment
The Meta Strategy signaled a regime switch to a new Bull Market environment. This signifies a higher probability for the bull case scenario that has been part of my weekly newsletter’s key insights for several months: “Enormous monetary and fiscal stimulus acts like rocket fuel to propel asset prices higher“. The answer to the all-important question (economic slowdown vs. fiscal stimulus – what will be stronger?) has just become likely to be: the FED wins round #1.
A relatively low chance that this is a fake signal that will revert quickly remains at about 15% probability historically.
A new equity bull market regime is a big deal, because now basic market assumptions change and fresh information is weighted differently in a bullish context.
The recent rally still has a host of short-term warning signals flashing (more details about this in my premium reports every Monday). Broad market breadth is getting weaker and weaker as very few big tech stocks hold up the market. Signs of rampant exuberance and speculation are visible in the options markets & inexperienced retail trader’s behavior while we still see elevated levels of volatility. We can expect turbulent short-term market moves.
The stock market’s resilience in the face of widespread skepticism by many market analysts is a very good sign over the long-term, however.
The second quarter ended with a 20%+ gain and such exceptional returns are not a sign of the top for the S&P 500: historically (since 1950) all following 6-month periods were positive – most by double digits.
Overall we do not really have to make decisions considering these factors, because the Meta Strategy will systematically tell us what to do. I choose to implement the strategy in a conservative fashion within its rules and spread the rotation from gold into un-leveraged equities over some time to stay more diversified.
Gold had a higher relative strength than stocks over the last month and as long as that persists it is a promising asset to hold under conditions of high uncertainty.
The Meta Strategy signals
The strategy’s technical indicators signaled a return to a bull market regime in the beginning of last month. The S&P 500 has held above its long-term trend (275-day moving average) and finally changed back to a bull market environment when the 60-day moving average crossed above the 275-day moving average (Golden Cross). Volatility is still elevated, but the danger signal – the VIX futures term structure – shows a green light.
While fundamental indicators still mirror widespread horrific economic conditions (the model signals red), most of the data is showing distinct improvement from the deepest lows. Monetary stimulus and the famous „FED Put“, that drives investor’s conviction that there is solid protection in place to keep stocks from falling too far, are a major reason for the strength of equities in the last months. Now the economy has to prove its ability to recover as a basis for a sustainable bull market – especially in the face of elevated stock market valuations.
The Economic Surprise Index is at an all-time high, which bodes well for future returns, but is currently signaling a dent in the strong recovery due to the resurgence of Coronavirus infections worldwide.
Here you can find acomprehensive list of fundamental and technical indicators used in the Meta Strategy model, including a list showing their warning signal triggers.
Current asset class selection
| Asset Class | Portfolio allocation |
| Risky assets: stocks | 50% |
| Safe assets: bonds | 0% |
| Alternative assets: gold | 50% |
| Cash | 0% |
| Aggressive assets: short stocks | 0% |
Why did I select these asset classes?
The Meta Strategy signaled a re-entry into equities on July 10th 2020 – its default positioning.
Gold remains the preferred alternative asset, because it shows a strong up-trend and great value in current conditions. As long as its relative strength persists I will stay diversified between these two asset classes.
Find the systematic rules governing the asset allocation in the model portfolios here.
Current portfolio
| Defensive ETF portfolio | 50% Gold & 50% S&P 500 ETF |
| Aggressive ETF portfolio | 50% Gold & 50% S&P 500 ETF |
List of ETF
Current regulations prohibit Eurozone investors from buying US based exchange traded funds (ETF), but they can choose EU equivalents. Several choices are usually available and I only list one possibility here. Best practice is to select the cheapest, most liquid ETF available.
| US ETF | S&P 500: SPY or 2x S&P 500: SSO Inverse/short S&P 500: SH Euro STOXX 50: FEZ 2x Euro STOXX 50: FFEU Gold: GLD |
| EU ETF | S&P 500: iShares Core S&P 500, IUSA, ISIN IE0031442068 2x S&P 500: Xtrackers S&P 500 2x Leveraged Daily Swap, DBPG; ISIN LU0411078552 Inverse/short S&P 500: Xtrackers S&P 500 Inverse Daily Swap, DXS3, ISIN LU0322251520 Euro STOXX 50: Invesco Markets plc-EURO STOXX 50, SC0D, ISIN IE00B60SWX25 2x Euro STOXX 50: Lyxor EURO STOXX 50 Daily (2x) Leveraged, LVE, ISIN FR0010468983 Gold: iShares Physical Gold ETC, PPFB, ISIN IE00B4ND3602 |
Portfolio performance
Monthly returns of the two model portfolios are tracked in real time since January 2019 (this is not a backtest). I invest my own money in the aggressive ETF portfolio.
New positions are entered at the daily closing price one day after the newsletter’s publication.
Portfolio performance assumes no commissions which is realistic for some US discount brokers. Transaction costs are higher at EU brokers and traditional banks.
The model portfolios are not currency hedged. I use US ETF to track performance in US$. Depending on the investor´s location currency fluctuations have an impact, that tends to equal out over time.
Using the Meta Strategy framework with different trading strategies
The Meta Strategy framework is very versatile and can be used to allocate capital to individual trading strategies rather than only invest in broad market index ETF – this has the potential to enhance performance or to hedge some of the portfolio volatility.
Meta Strategy Derivatives Portfolio
This holistic investment and trading portfolio, that combines the Meta Strategy Aggressive ETF Portfolio with a trading strategy using derivatives (e.g. options), is now available as a premium subscription. I describe the ideas behind a Probability Map for future returns of the S&P 500, which drives the trading decisions in the Meta Strategy Derivatives Portfolio, in this article and you can see what the weekly report looks like here.
Recent key market insights
Sometimes all the data points in one direction – this is not the case currently and my equity derivatives positioning is neutral. Recent market studies show a strong split in results: short-term returns still show significant danger, but medium- and long-term data is very positive. It all depends on the impact of recent roll-backs of the opening of the US economy in face of rising Coronavirus infections and the consequent trajectory of the economic recovery – which is extremely uncertain and difficult to forecast.
Better opportunities can often be found elsewhere while US equity return forecasts are neutral. I introduced a new section on asymmetric trades in my weekly report to broaden the investment universe with additional ideas.
The working thesis is, that we are in a speculative environment which is now supported by a bullish long-term market trend. Strong momentum often holds for considerable time before turning around violently.
This has played out in precious metals over the past weeks and a recent option trade managed to catch the parabolic move in Silver for a 250% gain in just a couple of days.
The strategy is now updated in the weekly Meta Strategy Derivatives Portfolio – Probability Map update (premium subscription).
Back to some additional information on the Meta Strategy ETF portfolios:
Position history
| Date | Defensive Portfolio | Aggressive Portfolio |
| 06.01.19 | cash | cash |
| 06.02.19 | cash | cash |
| 06.03.19 | bonds, gold | bonds, gold |
| 06.04.19 | US stocks, gold | 2x leveraged US stocks, gold |
| 06.05.19 | US stocks, EU stocks | 2x leveraged US stocks, 2x leveraged EU stocks |
| 06.06.19 | US stocks, EU stocks | 2x leveraged US stocks, 2x leveraged EU stocks |
| 06.07.19 | US stocks, EU stocks | 2x leveraged US stocks, 2x leveraged EU stocks |
| 06.08.19 | US stocks, EU stocks | 2x leveraged US stocks, 2x leveraged EU stocks |
| 06.09.19 | US stocks, EU stocks | 2x leveraged US stocks, 2x leveraged EU stocks |
| 06.10.19 | US stocks, EU stocks | 2x leveraged US stocks, 2x leveraged EU stocks |
| 06.11.19 | US stocks, EU stocks | 2x leveraged US stocks, 2x leveraged EU stocks |
| 06.12.19 | US stocks, EU stocks | 2x leveraged US stocks, 2x leveraged EU stocks |
| 06.01.20 | US stocks, EU stocks | 2x leveraged US stocks, 2x leveraged EU stocks |
| 06.02.20 | US stocks, EU stocks | 2x leveraged US stocks, 2x leveraged EU stocks |
| 04.03.20 | 50% US & EU stocks | US stocks, EU stocks |
| 10.03.20 | cash | cash |
| 05.04.20 | cash | cash |
| 05.05.20 | gold | gold, short US stocks |
| 05.06.20 | gold | gold, short US stocks |
| 05.07.20 | gold | gold, short US stocks |
| 13.07.20 | gold | gold, cash |
| 05.08.20 | gold, US stocks | gold, US stocks |
Historical performance backtest
A 15-year backtest, followed by one year of actual investment performance, (06-2003 to 10-2019) of the Meta Strategy Defensive (red) and Aggressive (blue) ETF Portfolios shows the advantages over buy-and-hold portfolios distinctly: Losses in the worst bear markets were reduced, while overall returns were improved in the defensive ETF portfolio. Throughout the backtest the defensive strategy earned about 1% more annually than an investment in the S&P 500 (grey) and the ride was a lot smoother, avoiding the sleepless nights of 2008/09.
These lower drawdowns make a responsible use of leveraged and inverse ETF possible. The aggressive strategy (blue) more than doubled the annual return of an investment in the S&P 500 in the backtest with fewer than two allocation changes per year on average – 16,70% vs 6,73% annually leading to 3,6x more money earned over the 15 year backtest period (not including dividends or transaction costs).
For comparison I included the performance of a buy and hold investment in a 2x leveraged S&P 500 ETF (green). Here the lethal volatility of untamed leverage becomes apparent: an 83% drawdown in 2008/09, but an outperformance over the S&P 500 over the whole backtest period nonetheless.
Investors seeking a different return / risk profile from the model portfolios can simply mix them with a safe, short-duration treasury bond ETF. For example, the Meta Strategy Defensive ETF portfolio can be expected to lose around 25% from its highs occasionally (in extreme circumstances, e.g. the crash of 1987, losses might even be worse) – half the maximum drawdown of the stock market. Investing only half of the available capital in the portfolio will bring the maximum drawdown down to around -12,5%, but can be expected to yield only half the return of the stock market. The same principle works to dilute the Meta Strategy Aggressive ETF portfolio to yield returns and drawdowns between the defensive and the aggressive portfolios.
Backtested results are hypothetical and NOT an indicator of future performance.
Disclaimer
This letter is a description of my own investment approach and ideas and I personally invest in the aggressive ETF and derivatives portfolio. The content of this letter is for entertainment purposes only and not meant to be investment advice to others.
I am not an investment advisor and I do not provide individual investment advice. None of the ideas in this letter are meant to be construed as professional financial advice.
Your investment decisions are solely your own responsibility and I am not legally or financially responsible for any losses you may incur from reading or using the content on this letter.
Authors may or may not have positions in the securities or related securities mentioned in this blog and newsletters.
All backtested results are hypothetical and NOT an indicator of future performance.
© 2020 David Steets, all rights reserved
David Steets holds the international copyright to all content in this newsletter, any kind of usage of texts and images permitted only with prior written consent by David Steets.