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The monthly newsletter “The Meta Strategy ETF Portfolio” details the market-beating ETF portfolios, that I use to invest my own money.
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Historical backtest for ETF model portfolios
Both model portfolios use the same signals, but invest in different instruments:
The defensive portfolio invests long-only in regular broad asset class ETF or cash.
The aggressive portfolio uses 2x leveraged equity ETF (returns are likely to be higher, but drawdowns will double as well) and is allowed to use inverse equity ETF (that have positive returns, when the market goes down) in the worst market conditions.
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.