Money management and following a proven market anomaly are also critical. But the subject of this post is instrument selection.
The Fama-French data shows annualized return from 1926-2000 was:
Small Value Stocks 14.9%
Large Value Stocks 12.9%
Large Growth Stocks 10.8%
Small Growth Stocks 9.9%
Vanguard offers VISVX or VBR to participate in small value outperformance.
More recently, in the previous two bullish periods, 2003 to 2007 and 2009 to 2013:
|CAR%||Sharpe||Max DD||CAR%||Sharpe||Max DD|
Notice how small value performs well and could possibly be used as an all-weather instrument choice for the intermediate term strategies discussed on this blog. One risk of selecting sector ETFs is their narrowness and therefore possibility of under-performance in a specific market period. One could make a case that bargain hunters buy value in a declining market, providing some support (this may drive the performance Fama-French found).
More on XIV in the next post: higher risk and higher reward with an inbuilt structural advantage 80% of the time. A portion of equity could be allocated to XIV to boost returns, with the balance in low-beta (for example).
A weekly 2 year correlation table is shown below. Notice in the second column how closely small value (VISVX) has tracked FLSTX which is one of the highest performing unleveraged funds.