Strategy - Protective Asset Allocation (Canadian)

Overview

A defensive strategy that takes advantage of absolute and relative momentum. Allocates to a crash protection asset to defend against downturns. Its goal is to provide an 'appealing alternative to a 1-year term deposit'. Takes advantage of absolute momentum and relative momentum. Absolute momentum is the observation that, over certain lookback periods, an asset's previous returns can predict its future performance. Relative momentum is the observation that an asset's past performance relative to another asset can predict its future performance. The crash protection asset allocation is adjusted based on the recent performance of the ETFs considered by the strategy. Generally provides exposure to a variety of asset classes. This provides protection from cases where the Canadian or global economies slow down, as well as from increasing interest rates.

Past Performance

Relatively low performance during bull markets (2002-2007, 2009-present), but the crash protection asset improved protection during bear markets (2000-2001, 2008).

Source Information

Based on the paper 'Protective Asset Allocation (PAA): A Simple Momentum-Based Alternative for Term Deposits' by Wouter Keller and Jan Willem Keuning.

Trading Information

Transaction costs are relatively large as up to seven ETFs are rebalanced monthly. Only suitable when trading costs are low.

Risk Level

Moderate

Assets

Name Symbol
Asia Pacific Equities VA.TO
Emerging Market Equities XEM.TO
European Equities XEU.TO
Global Real Estate CGR.TO
Gold CGL-C.TO
Intermediate Government Bonds ZFM.TO
Long Government Bonds ZFL.TO
NASDAQ 100 HXQ.TO
S&P 500 Index ETF XUS.TO
S&P/TSX Capped Composite Index ETF XIC.TO
US Corporate Bonds XIG.TO
US High Yield Bonds CHB.TO
US Small Cap Equities XSU.TO

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Strategy Backtest

The information below shows how well this strategy performed in the past so that you can determine if it would be a good fit for you. The strategy backtest results are shown compared against the "Couch Potato - Balanced" benchmark strategy.

$10,000

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