FVEr Trading Strategy

10 Year Backtest*

*Backtest updates each weekend, and data may indicate “Updating”.

*This is backtested data. Past results do not guarantee future performance.

*For actual real performance data, consult our Performance tab.

The FVEr Strategy allocates towards:

  • 2x or 3x leveraged ETFs tracking the underlying benchmark index when the trading strategy flashes certain undervalued criteria (around 40% of the time). The 3x leveraged ETF is the default unless there is no 3x leveraged ETF.

  • 1x inverse ETF when the trading strategy flashes certain overvalued criteria (around 10% of the time). For sectors, it is a 2x inverse ETF.

  • The (un-leveraged) underlying benchmark index when the trading strategy flashes certain neutrally valued criteria (around 50% of the time)

ETF Table

Alpha represents the excess return of an investment or portfolio compared to the return of a benchmark index, after adjusting for the risk taken. In our case, the benchmark index is the un-leveraged index.

  1. Alpha provides a more accurate picture of true performance of a strategy. An investment that delivers high returns by taking on excessive risk isn't necessarily a good performer. This is a very important concept to recognize.

  2. A positive alpha indicates investment return that cannot be explained by the benchmarks overall movement — the “secret sauce” of a strategy. Most of our strategies have positive alpha.

  3. In the case of the QQQ 3x FVEr Strategy, even though the strategy outperformed the benchmark QQQ over the last 10 years, the additional return was not sufficient to compensate for the higher level of risk, due it’s slight negative alpha. We still believe in using the QQQ 3x FVEr Strategy.

Beta as Volatility: Beta measures the volatility (or systematic risk) of an investment or portfolio in relation to a benchmark index, in our case the un-leveraged index. It quantifies how much an asset's price tends to move in response to market movements.

  1. Understanding Market Sensitivity: Beta provides insight into an investment's sensitivity to benchmark fluctuations. A higher beta indicates that an investment tends to move more than the benchmark, while a lower beta suggests less volatility.

  2. Interpreting Beta Values:

    • Beta of 1.0: The investment tends to move with the benchmark. If the benchmark goes up 10%, the investment is expected to go up 10%.

    • Beta > 1.0: The investment is more volatile than the market. A beta of 1.5 suggests it might move 1.5 times as much as the market.

      • Leveraged ETFs, like 2x or 3x ETFs, have beta values near 2 or 3, respectively. Our 2x and 3x FVEr Strategy reduces the beta significantly, by dynamically allocating out of the leveraged ETFs when neutral or overvalued criteria are triggered.

    • Beta < 1.0: The investment is less volatile than the market. It might move only 0.5 times as much.

    • Beta < 0 (Negative Beta): The investment tends to move in the opposite direction of the market. Inverse ETFs, like SH, are designed to have negative betas (e.g., -1.0).

      • Our 2x and 3x FVEr Strategy allocates into negative beta inverse ETFs, when overvalued criteria are triggered.

  3. Risk Compensation: While higher returns might correlate with higher beta, beta itself doesn't assess if the additional return is sufficient compensation for the additional risk taken. That's where alpha comes in.

    1. A strategy with high beta and negative alpha (like the QQQ 3x FVEr Strategy example) suggests that the higher returns were primarily due to taking on more market risk.

  4. Strategic Application: Recognizing an investment's beta helps in portfolio construction. Investors can use high-beta assets to increase market exposure when the benchmark is undervalued, or low/negative-beta assets for defensive positioning when the market is overvalued.