E This May Or May Not Be The Right Time For RVRS

I co-authored a paper on RVRS in 2016 that now appears on the website of the Global Finesse consulting firm where I head the Investment product consulting practice. It also is on the Exponential Shares website as RVRS is an Exponential Shares product. 

RVRS is a solid investment strategy based on three proven constructs: Mean Reversion; the Size Factor; and the Value Factor. It simply re-weights the S&P 500 Index constituents quarterly by the reciprocals of their market cap weights. 

In the historical study we performed, a portfolio based upon the same strategy outperformed RSP, the equally weighted S&P 500 ETF, and SPY by more than 300 basis points per year. 

In the backtest, the portfolio akin to RVRS generally outperformed in strong S&P 500 years and underperformed but not by as much in weaker S&P 500 years. But in 2018, with the S&P 500 increasingly top-heavy with the FAANG stocks in the first half of the year, the reverse has been true.

When the S&P 500 has plunged, RVRS has held up and even has had positive results on some negative weeks. This is somewhat reminiscent of 2000 at the beginning of the tech bubble when the small-cap Russell 2000 gained more than 10% while the S&P 500, also top-heavy with tech stocks at that time, lost 20+%. It should be noted that the bear market that ensued in late 2001 and got a lot worse in 2002 before it got better in 2003, the Russell 2000 plunged even more than the S&P 500. If there was an RVRS then, it also would have held up in 2000, then plunged worse than the S&P in 2002 but not as badly as the Russell 2000 which had more stocks encountering financial distress.

Therefore to the extent that the current S&P 500 mini-plunge is and continues to be driven by tech, RVRS is a sound investment and a better place to put core investments than SPY. However, if full market carnage develops, no broad market equity index will hold up in the typhoon.

Disclosure: None.

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Alpha Stockman 6 months ago Member's comment

Short, but good, thanks.