VTS Community

We will close our current Iron Condor out for profit today so don’t miss that below.  But great question here from our friend Dan: 

“Can you give me any insight on why the Tactical Balanced Strategy went to IEF earlier this week? With bond prices driven so much by interest rates—and interest rates so low and pointing up—it just doesn’t seem like there’s any room for bonds to move up.”

This is a great question and he’s absolutely right, with interest rates looking like they are set to continue rising, it does pose a potential headwind for bond prices going forward.

  • Remember there is an inverse relationship between interest rates and bonds.  If interest rates rise, performance of bond funds like IEF will likely decline, and vice versa.

Here’s a 5 year chart of US 10 year treasury:

 

We’re once again closing in on that 3% level.  We’ll see very soon if we break through it or not but the bottom line is if the Fed continues to hike interest rates, this probably won’t be good for the IEF which makes up roughly 25% of our VTS Tactical Balanced Strategy.  So the real question is:

Should we even bother with our IEF positions at this point?

In my opinion, yes.  I don’t like to make any market predictions or cloud my strategies with my macroeconomic forecasts.  I’m very disciplined and try to remain 100% quant based whenever possible.  I track a long list of indicators from day to day and it’s the thresholds of those indicators that determine what positions we hold.

Now gun to my head I would guess that interest rates will continue to rise for the next couple years and I hope to see 4% or higher before we enter the next recession.  I’m genuinely concerned about what will happen if we enter the next recession with interest rates still artificially low.  However I could be wrong.  It’s certainly possible that we just hang out in this current range, or even go the other way again and actually see a decline.  While I think it would be very ill-advised, more quantitative easing in the future isn’t out of the question.  Remember there’s plenty of countries in the world that have negative or near zero interest rates.

So for that small portion of the VTS Tactical Balanced Strategy, as of now I will keep everything the same and if we hold IEF bonds then so be it.  If rates rise it’ll likely not be any better than holding cash, but the important thing to remember is that the IEF portion of the strategy isn’t meant to make much money.  I know that sounds strange to some, but in my opinion not losing money is often times more valuable than trying to make money.

It’s our MDY stocks and our GLD gold positions that are designed to make the bulk of the profit.  Either stocks for good times or gold for troubled times.  The IEF portion is basically there to just tread water while we wait for better positions.

 

Here’s the performance of just the IEF Bonds portion:

 

We’re only holding IEF Bonds for roughly 23% of trading days, but that above performance isn’t bad considering there aren’t any better options for this portion of the strategy.

 

Hypothetically using SPY stocks, GLD gold, or cash instead:

SPY stocks  –  Obviously this is a non starter.  Our IEF holdings are at times when it would not be a good time to be in stocks.  The last few years has seen stocks pushing higher with only occasional pullbacks, but in the long run the performance is terrible in this section of the market.

 

GLD gold  –  Long-term performance is close but it comes with a lot more volatility.  Gold could be a viable replacement but I don’t see any need to add any stress to a strategy that is designed to be our “core” portfolio holding.

 

Cash  –  Also a viable option especially in the last few years.  If any of the VTS community wanted to hold cash every time the strategy says to hold IEF I would certainly understand that decision.  I always tell everybody exactly what I do with my own money, so for me I will still be using IEF.  However if you want to replace with cash, feel free to do that.

 

Current VTS Total Portfolio Solution Allocations

25% VTS Tactical Volatility Strategy

50% VTS Tactical Balanced Strategy

25% VTS Iron Condor Strategy

VTS Aggressive Vol Strategy  –  Optional replacement for higher risk tolerance investors

VTS Conservative Vol Strategy  –  Optional replacement for lower risk tolerance investors

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