Revisiting the Performance of TAA ETFs

Tools for better equity exposure?

August 2022. Reading Time: 10 Minutes. Author: Nicolas Rabener.

SUMMARY

  • There has been a boom in launching tactical asset allocation ETFs
  • However, the recent track record of these has been poor
  • Declining stock and bond markets have created a challenging environment for these

INTRODUCTION

Most investment strategies become popular through short rather than long periods, simply because no strategy works all the time. The longer the track record, the more explanation is required for why the strategy has merit as it will include periods of underperformance.

For example, the global financial crisis was great for tactical asset allocation strategies as it featured a slowly evolving bear market. By the time stock markets crashed seriously in 2008, many of these strategies were allocated out of equities and into bonds, thus preserving capital and increasing popularity with investors.

However, the decade thereafter was less attractive as there were many quick stock market crashes followed by even quicker recoveries due to central bank interventions. Most of these strategies are slow-moving and only managed to sell out of equities after stocks had fallen significantly, therefore often selling at the bottom, which became worse as they failed to reenter quickly and participate in the swift recoveries.

The year 2022 is reminiscent of 2001 and 2007 as the stock markets are declining, but not crashing yet. Perhaps it will be a year of redemption for tactical asset allocation strategies, perhaps not. In this research note, we will analyze the performance of tactical asset allocation ETFs (read Defining Tactical Asset Allocation).

TACTICAL ASSET ALLOCATION 101

The likely most popular tactical asset allocation strategy is using the 200-day average on an equity index like the S&P 500 to determine allocations. If positive, ie stocks are up, then allocate 100% to U.S. stocks via an ETF, if negative, allocate 100% to bonds like U.S. Treasuries. It is a simple risk-on risk-off model.

We contrast the performance of this simple tactical asset allocation (“TAA”) strategy versus the S&P 500 and a static equity-bond (60% / 40%) portfolio.