TuringTrader's Pick Me Up

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Key Facts

  • volatility-targeting strategy
  • rebalanced daily
  • up to +30% leverage
  • invests in
    • Large-cap U.S. stocks
    • U.S. treasuries

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Summary

Pick Me Up is a proprietary premium strategy by TuringTrader.com, introduced in February 2020.

Pick Me Up aims to beat the S&P 500 while at the same time offering lower volatility. To achieve this goal, Pick Me Up combines volatility-targeting with moderate leverage. The strategy invests in an S&P 500 Index ETF, as well as in a 3x leveraged ETF tracking the same index, reaching up to 130% total exposure to the stock market. Volatility-targeting is used to manage portfolio volatility and tame volatility-decay of the leveraged ETF. As a risk-off asset, Pick Me Up uses U.S. treasury bonds.

Pick Me Up has moderate maintenance requirements. While the strategy calls for daily rebalancing, its short menu of ETFs makes this task straightforward.

Performance

The chart above shows the portfolio’s historical performance and drawdowns, compared to their benchmark, throughout the simulation. The chart below shows the portfolio’s annual returns:

This table shows the performance metrics for TuringTrader's Pick Me Up:

Asset Allocation

The portfolio last required rebalancing after the exchange's close on n/a. The current asset allocation is as follows:

- Delayed Data -

Review

Strategy Rules

The operation of Pick Me Up can be summarized as follows:

  • scale exposure to the S&P 500 inversely to historical volatility
  • reduce this exposure if
    • VIX term structure enters backwardation
    • 12-months rolling maximum drawdowns exceed unhealthy levels
    • the leveraged ETF fails to properly track its underlying
    • the economy enters a recession, as detected through the unemployment rate
  • invest the remaining capital in U.S. treasury bonds

Pick Me Up reflects the idea that in the long term there is no better growth opportunity than the U.S. stock market. The biggest risk to this approach stems from periods of high volatility, or economic downturns. We encourage investors keen on learning more about the rationale behind the strategy to read our articles regarding volatility targeting and leveraged ETFs.

Diversification

The strategy is well diversified in terms of individual titles, as it only invests in broad indices. However, in bullish periods of low volatility, the strategy may have up to 130% exposure to the stock market, leading to amplified tail risk in case of rapidly spiking volatility.

Returns & Volatility

Pick Me Up beats the S&P 500 in most years, and yet has shown docile behavior throughout the last economic cycle. The portfolio managed the 2008 recession quite well, even though partially missing out on the 2009 rebound. The strategy’s average drawdowns and maximum drawdowns are significantly lower than buy & hold, and recovery from drawdowns is much faster.

The Monte-Carlo simulation confirms these observations. Even though we have high confidence in Pick Me Up’s maximum drawdown to be lower than that of the index, it might, however, not be as low as the backtest suggests. More reasonably, investors should anticipate a maximum drawdown of around 35%.

Account & Tax Considerations

When the strategy scales its stock market exposure, it triggers taxable events. However, Pick Me Up holds at least 60% of its positions for several years. Therefore, Pick Me Up is a great candidate for taxable accounts, with a tax burden similar to that of a passive 60/40 portfolio.

Pick Me Up makes use of a 3x leveraged index ETF, which is considered a high-risk instrument. Most brokerages require signing additional disclosures before allowing investors to use these instruments in their accounts.

Pick Me Up invests in no more than two ETFs at a time. Therefore, it should function as intended with as little as $3,000 of capital.