iQ All Cap Risk On / Risk Off High Yield Model

INVESTMENT OBJECTIVE

The iQ All Cap Risk On/Risk Off High Yield Model utilizes four non-correlated factors to determine an allocation between all cap high-yield stocks (Risk On) and long-term Treasury bonds (Risk Off).

PROCESS

The model utilizes the following four factors to determine its allocation to stocks and/or bonds:

  • Technical (month-end price to 9-month moving average of the Wilshire 5000 Index)

  • Macro (yield curve)

  • Valuation (S&P 500 Price-to-Earnings Ratio)

  • Seasonal (sell in May but stay based on the mid-cap ETF Money Flow Index)

The model allocates 25% to each of the aforementioned factors. The model is completely allocated to stock ETFs if all four factors are "risk on." A 50% allocation to stock ETFs and a 50% allocation to a bond ETF are made by the model if two out of the four indicators indicate that there is "risk on" behavior.

When the model allocates to stocks, it utilizes the following (monthly) all-cap high-yield screen:

  • Start with the largest 2,000 domestically-traded stocks.

  • Sort by dividend yield and select the top 60 stocks.

  • Sort the remaining 60 stocks by 12-month less 1-month price momentum and select the top 40 stocks.

  • Sort the remaining 40 stocks by 3-year seasonal monthly price momentum and select the top 10 stocks.

This model reconstitutes every month.

The benefits of a risk-on/risk-off approach

A risk-on/risk-off (RoRo) investment approach is a strategy in which an advisor adjusts their portfolio allocation based on their perception of market risk. In this approach, when the advisor perceives that market conditions are favorable and risk is low, they will invest in riskier assets, which is referred to as the "risk-on" phase. Conversely, when they perceive that market conditions are unfavorable and risk is high, they will shift their portfolio allocation to less risky assets, which is referred to as the "risk-off" phase.

Some of the potential benefits of a risk-on/risk-off investment approach include:

1. Diversification: By rotating between asset classes based on market conditions, investors can achieve a more diversified portfolio and potentially reduce overall risk.

2. Capital preservation: The RoRo approach can help protect capital during times of market stress by shifting to less risky assets.

3. Opportunity for higher returns: During the risk-on phase, investors can potentially earn higher returns by investing in riskier assets that have the potential for higher returns.

4. Flexibility: The RoRo approach is highly adaptable and can be adjusted to suit changing market conditions and the investor's risk tolerance.

However, it's important to note that the RoRo approach also has potential drawbacks, including the possibility of missing out on market opportunities during the risk-off phase.

Overall, the RoRo approach can be a useful strategy for investors who are comfortable with a more active and flexible investment approach.

Please be aware that risk-on, risk-off strategies involve heightened risks and may not be suitable for all investors. These strategies aim to capitalize on market fluctuations, shifting between riskier and safer assets based on prevailing market conditions. However, the effectiveness of such strategies is subject to uncertainties, and there is no guarantee of consistent positive returns. Investing in risk-on assets during market upswings may lead to higher returns, but it also exposes investors to greater losses during downturns. Conversely, allocating to risk-off assets during market declines may offer protection but can result in missed opportunities during growth periods.