> Diamond:
ETF “DDM,” which gives two times the return of the DJIA each day
ETF "UST," which gives two times the return of the US 7-10y bond index each day
> Sapphire:
ETF “UDOW,” which gives three times the return of the DJIA each day
ETF "TYD," which gives three times the return of the US 7-10y bond index each day
In the performance comparison described below, all Diamond and Sapphire portfolios are superior to the DJIA and the Vanguard funds that are alternatives to the Focused 15 Investing portfolios. Compared to Diamond portfolios, the Sapphire portfolios have higher return for a given level of variability.
For example, if you are currently using Diamond|Onyx 35|65 (sg218), you can get higher return with the same level of (or slightly less) variability using Sapphire|Onyx 15|85 (sg315.1).
We get higher return with lower variability because in Sapphire, we can allocate less to UDOW to get the same impact as a comparable Diamond portfolio using DDM, and that allows us to allocate more money to the low volatility sectors in the Onyx sleeve. Thus, UDOW plays a useful role in a Sapphire portfolio. The result is that the Sapphire portfolios provide very attractive return and variability characteristics.
All Focused 15 Investing model portfolios are designed to deliver specific return and variability characteristics at the level of the entire portfolio, not the individual holdings. Understanding this point is especially important for the users of a Sapphire portfolio with its very volatile ETF UDOW.
This page contains:
- Return-to-variability graph that shows the relative position of portfolios in the Diamond and Sapphire publications
- Statistics about the portfolios showing long-term rates of return (adjusted for structural costs), maximum drawdowns (losses), and recovery periods for the portfolios
- Maximum possible exposures to the stock market of the different portfolios
- The total amount of money, industry wide, in related ETFs
- Next steps (as of September 28, 2021) for current users of Diamond and the earlier versions of Sapphire portfolios
- Theme portfolios that replace add-in sleeves
1. Return-to-Variability
The graph below shows portfolios from Diamond and Sapphire publications. The DJIA and two Vanguard mutual funds are also shown for reference. Annualized return is shown on the vertical axis, and annualized variability of returns is shown on the horizontal. The portfolio’s simulated return since 2000 is shown in the label of each portfolio.
I reduce each portfolio’s annualized return to account for “structural costs,” which are the maximum loss of return attributable to the fees embedded in the ETF’s returns and any shortfall the ETFs have when compared to the indexes we use to calculate performance. The return figures have been reduced by an arbitrary 80% of the estimated maximum structural costs of the portfolio. I use 80% because the portfolios use the most expensive ETFs (i.e., those with high-structural cost) less than 100% of the time.
As it turns out, whether we use 100% or 80% does not meaningfully change the relationships described. To further ensure a fair comparison, I show the current design of all portfolios (see this blog page for more information on the meaning of “current design:” https://marketresilience.blogspot.com/p/algorithm-updates.html)
I show the following graphs in a large format for clarity.
We want portfolios with high return and low variability. Portfolios toward the upper left are superior to those toward the lower right. Note that the line connecting the Sapphire model portfolios is generally above and to the left of the line connecting the Diamond portfolios, suggesting better performance (e.g., higher return and lower variability) for Sapphire portfolios.
As noted above, the returns of all model portfolios reflect their current designs and have been reduced by the estimated maximum structural costs to help make the comparisons fair. The sleeve "Onyx for Sapphire sg301" shows how the Onyx sleeve performs without UDOW, and one can see that adding just 5% of the portfolio to UDOW increases return without a large increase in variability.
We want portfolios with high return and low variability. Portfolios toward the upper left are superior to those toward the lower right. Note that the line connecting the Sapphire model portfolios is generally above and to the left of the line connecting the Diamond portfolios, suggesting better performance (e.g., higher return and lower variability) for Sapphire portfolios.
As noted above, the returns of all model portfolios reflect their current designs and have been reduced by the estimated maximum structural costs to help make the comparisons fair. The sleeve "Onyx for Sapphire sg301" shows how the Onyx sleeve performs without UDOW, and one can see that adding just 5% of the portfolio to UDOW increases return without a large increase in variability.
The portfolios are attractive because they deliver higher returns than alternatives of similar variability.
Alternatives to VBINX:
Sapphire|Onyx 5|95 (sg305.1)
Sapphire|Onyx 15|85 (sg315.1)
Alternatives to VASGX:
Sapphire|Onyx 25|75 (sg325.1)
Sapphire|Onyx 35|65 (sg335.1)
Alternatives to DJIA:
Sapphire|Onyx 45|55 (sg345.1)
Sapphire|Onyx 55|45 (sg355.1)
The table below shows return and variability and other statistics about the model portfolios.
The two portfolios, Saphhire|Onyx 15|85 (sg315.1) and Saphhire|Onyx 25|75 (sg325.1) (pointed to by the blue arrow in the table above) are particularly attractive because of their high return-to-variability ratios.
3. Maximum Exposure to Stock Market
The table below shows the maximum possible exposure to the stock market. The Sapphire sleeve gets its exposure through the DJIA-linked ETF “UDOW.” The ETF “UDOW” gives three times the return of the DJIA each day. This means that it is very volatile. Yet, we can use less of it to get the desired exposure to the DJIA. The money we have left over can be invested in the low volatility ETFs in the Onyx sleeve.
Sapphire portfolios (and many Diamond portfolios) get additional exposure to stocks through the Utility (XLU) and Consumer Staples (XLP) ETFs. Since we rotate money among all the ETFs, a model portfolio does not have the maximum exposure to stocks at all times. Portfolios will hold the maximum allocations only when stocks are considered most resilient over several timeframes.
4. Assets Invested in Related ETFs
The table below shows the amount of money investors in general have invested in related ETFs.
Source: Bloomberg
It is interesting to note that the Sapphire-related ETFs have more assets than the Diamond-related ETFs. Specifically, UDOW has more assets than DDM, and TYD has more assets than UST. This means that these Sapphire ETFs are more widely used than the Diamond ETFs.
It is important to note that the liquidity of the ETF is not based on the size listed above, but on the liquidity of the underlying securities. This means that for our purposes, UDOW and DDM have similar liquidity. The DJIA and the US Treasury 10y bond market are very liquid from this perspective.
5. Next steps (as of September 28, 2021)
The suggested next steps in using one of the Sapphire|Onyx portfolios depends on what portfolio you are currently using.
For those currently following a Diamond portfolio, consider two options:
- Quick adoption - Select a model portfolio from the return and variability scatter chart above. Select one that is above or to the left of your current Diamond portfolio, that is, one that has lower variability.
- Gradual adoption - Create a separate account for a Sapphire portfolio with a small portion (for example, a few thousand dollars) of your Focused 15 Investing assets. Select a conservative Sapphire portfolio, e.g., sg315.1, sg325.1. Trade to get accustomed to trading patterns and the ETFs. Wait until the next Plant season to add more money to the new account. When comfortable with the portfolio originally selected, select a version with variability similar to the Diamond portfolio you have been using.
The new Sapphire publication has two theme portfolios. These are intended to be used as separate accounts rather than add-in sleeves to one Focused 15 Investing account. As separate accounts, we can use a broader range of ETF because the add-in sleeves had to have ETFs that were NOT in the other portfolios. They had to be unique to make the Shares-to-Trade worksheet work smoothly.
Perhaps more important, using a separate account enables us to track performance more effectively. In our current system, it is not practical for the publication to track performance of a portfolio if a subscriber elects to use an add-in sleeve.
