Static Indexing Beats Tactical Asset Allocation

Abstract

How do tactical asset allocation funds compare with a portfolio of index ETFs having the same investment style and bond- and foreign-market-augmented same-style Fama–French benchmarks? The authors find that portfolios of equally weighted TAA funds under-returned corresponding portfolios of index ETFs by gaps ranging from 1.77% to 5.15% per year, and corresponding Fama–French benchmarks by gaps ranging from 1.92% per year to 5.08% per year.

TOPICS: Portfolio construction, exchange-traded funds and applications, factor-based models, performance measurement

Key Findings

• ▪ Tactical asset allocation mutual funds and fund-of-fund ETFs substantially under-return static index funds that have the same style.

• ▪ The α’s from Fama–French multifactor models can be thought of as the extent to which an asset out-returns a benchmark consisting of long and short positions in various assets, with the portfolio shares in these positions described by their β’s.

• ▪ The α’s and β’s from the Fama–French regression models are identical to those calculated using Sharpe’s technique of performance measurement when the Sharpe benchmark weights are invariant during the same period as the Fama–French regression.