Today, we will provide updates on our ETF Strategy. Our ETF Strategy algorithmically employs our systematic analysis of the US economy and financial markets to create a rules-based, quantitative portfolio. At Prometheus, we focus on understanding the underlying mechanics that drive market environments. We use fundamental economic and high-frequency financial data to understand these macroeconomic environments and codify how to best trade markets. This process creates a robust portfolio solution that attempts to provide high return/risk characteristics and high percentage positive ratios at the portfolio level, regardless of the economic environment. Subscribe below so that you never miss out on our systematic insights into markets and portfolio strategy:
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Over the last week, we saw risk assets breathe a sigh of relief as asset markets moved against the dominant trend of tightening liquidity. These moves were broad-based, with the dollar selling-off relative to risk assets. We show this in a tabular form below:
Below, we show how this pricing evolved over the week:
Gold offered the smoothest sailing this week, up 4 out of 5 trading days. However, on a risk-adjusted return basis, both equities and commodities outperformed. These moves in gold and commodities were additive to our ETF strategy, but our equity and credit shorts suffered in this context. Taking a step back from weekly moves, our systems aggregated these cross-asset moves to confirm that we remain in a tightening liquidity market regime:
Our systems leverage our understanding of markets to evaluate market-implied regimes. Over the last month, markets have dominantly priced rising growth with no inflation bias. This pricing resulted in an unlevered loss of 1.2% on our ETF Strategy. We show the composition of weekly returns below:
However, these are primarily counter-trend moves, and our systems continue to tell us we are in a tightening liquidity environment. Furthermore, our systematic tracking and forecasting of economic fundamentals continue to confirm the likelihood that we will remain in this environment. Our systems expect growth to slow further, and we expect this to remain a headwind for equities and credit. Our systems also highlight that we are in a regime shift, where pro-cyclical assets like commodities, stocks & credit are increasingly likely to underperform countercyclical investments like treasuries, the dollar, & cash. Below, we show our systematic analog search tool, which looks for periods in history that have similar characteristics to those today to help us understand what to expect from markets. This analysis points us toward the dollar and treasuries, both of which have strong risk-adjusted returns in this environment:
Resultantly, our ETF Strategy has incrementally moved to reduce commodity exposures and has now decisively added to treasury securities. We show the composition of the ETF Strategy portfolio at the asset class level below:
This asset class mix reflects the following allocations at the security level:
Stocks: SPY (-3%), XLP (-3%), XLY (-2%), XLC (-3%), XLV (-3%), XLB (-3%), XLI (-3%), XLK (-2%), XLF (-3%), XLU (-3%), XLE (-2%)
Commodities: USO (2%), UGA (2%), UNG (1%), GLD (4%)
Fixed Income: GOVT(9%), IEF (6%), SHY (28%), MBB (9%), HYG (-5%), TIP (8%),
Currencies: UUP (8%)
While this week went against the ETF Strategy, we continue to expect the strategy to perform well over the economic cycle. We show the full backtest history of the ETF Strategy below:
We remain in an environment where capital preservation is the highest priority. Generating success on the short side is an active endeavor, and such exposures should be managed dynamically. Economic data is likely to worsen, and nominal growth will likely deteriorate. We stay positioned for these moves, now with an increasingly disinflationary tilt. Stay nimble.