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Asset Allocation 2-2: Dynamic S&P 500 & Fixed Income (2 ETF) Combination Strategy


Asset Allocation 2-2: S&P 500 & Fixed Income (2 ETF) Strategy



Most recent page update: Sunday, June 17, 2018


This Strategy Profile page provides you with an introduction to the "Adaptive Equity (2 ETF) Combination Strategy," including details of its investment approach, the makeup of the universe of ETFs from which it chooses, the drivers of its performance, documentation of historical performance, and an explanation of its impressive features and benefits. If you have any questions about this – or any of our other strategies, please contact us for assistance.



This strategy holds the two optimal Equity-based ETFs (of 216) at any given point in time. To maximize gains during robust rallies, the system may select leveraged (2x) long ETFs. When conditions are assessed as bearish (for example, as they were in 2008 through the first quarter of 2009), the strategy moves to a cash position to protect assets from loss.  Because it does not include a defensive component (that can hold back returns during bullish periods), this strategy is one of our most aggressive and is appropriate for investors comfortable with the slightly higher relative volatility that can occur when leveraged positions are employed, and market corrections occur. However, losses are minimized because the algorithms use cash when a contractionary environment begins, thereby reducing downside and significantly increasing risk-adjusted returns.

 Because this strategy always selects the two optimum equity ETFs, it provides the highest Risk-Adjusted Return of all our strategies, albiet with a bit higher Maximum Drawdown

Our Short Name for this Strategy is  "Equity-2"

Outstanding Performance in Both Bull and Bear Markets

Our Adaptive Equity (2 ETF) Rotation Strategy (or Eq-2 for short) combines two high-performance ETFs to comprise a single, high-return, uncorrelated 2-Asset, 2-ETF model. This Asset Allocation strategy features consistent upside performance regardless of market conditions and consistent profits – even when stocks are declining. Easy to trade with just two positions and, on average, two months between transactions, subscribers are rewarded with many significant benefits.

Equity Curve

A smooth, steadily climbing performance chart: As you can see from this chart that runs from inception on July 1, 2006-to-Present, theAdaptive Equity (2 ETF) Combination Strategy provides a steady and consistent upward climb in its equity curve.  The Eq-2 Strategy's performance is shown with the red line while the benchmark, a 70-30 combination of the S&P 500 ETF (SPY) and the Total Bond Market ETF (BND) is shown by a blue line.




PERFORMANCE - SINCE INCEPTION (July 1, 2006 - Present)

Asset Allocation 2-2: Dynamic S&P 500 & Fixed Income Combination

The blue line shown as the benchmark is a buy-and-hold of the S&P 500 (large-cap) ETF (SPY).
The red line shows the Adaptive Equity Rotation (2 ETF) Strategy's performance since inception.

Note: Since the chart above is not logarithmic, recent volatility will appear more significant than past volatility – even if it is actually less.
Observe the lower window to compare periods of volatility.



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The advantage of running two uncorrelated strategies in an Asset Allocation model is that by combining the two, we benefit from a drop in volatility and improved risk-adjusted returns. This strategy provides the best Sharpe Ratio (a measure of risk-adjusted return) of all our strategies, at 1.56. Its Sortino Ratio (another measure of risk-adjusted return that focuses on downside volatility) is a whopping 2.22 - the second-highest of our strategies (behind our very conservative Fixed Income Strategy).

With a compound annual growth rate of just below 27%, this two-asset combination strategy nearly quadruples (387%-times) the average return of the benchmark S&P 500 index (6.96%) and on average, outperforms 99.7% of mutual funds in the last 10 years. Since inception in July, 2006, this strategy has outperformed its S&P 500 benchmark every year, and has never experienced a money-losing year.



Inception: July 1, 2006
Rebalance Frequency: Weekly
Average Hold Time: 65.8 business days (about 3.3 months)
Annualized Return: 34.42%
Max Drawdown:
Financial Crisis Return
(Dec.'07-Mar.'09): 0% (This strategy moves to a cash during recessions)
2017 Return: 65.98%
2017 Max Drawdown: -8.84%
Sharpe Ratio (risk-adjusted return): 1.40 (compare to S&P 500 at 0.59)
Sortino Ratio (risk-adjusted return): 2.09 (compare to S&P 500 at 0.76)



The Performance Difference in Dollars

AWe would like to provide you with an example of the return difference between this strategy and its benchmark - the SPDR S&P 500 ETF (SPY). This benchmark , one which millions of investors are using for their primary savings, provides an annual return of 7.74% in the last 20 years. Not too shabby, right? Especially when you consider that the average mutual fund investor gets a return of just 2.6%.

However, by owning the optimal two equity ETFs (of 216 high-volume equity ETFs) at any given time, you could receive an annual return of 34.42% – which is 4.45 times (445%) times the annual return of the SPY benchmark!

The financial implications of that difference is phenomenal. For example, $100,000 placed in a buy-and-hold of the S&P 500 ETF (SPY) - i.e., the benchmark, you would have $444,160 after 20 years. In comparison, that same $100,000 invested using our Adaptive Equity Rotation (2 ETF) Strategy would be worth $36,981,572 after 20 years – yes, that's more than thirty-six million dollars – a phenomenal 83-times the return you would have received over the same 20 years if using the benchmark ETF (SPY) without our signals service.

If you are just starting your career and are planning to save for retirement or financial freedom, this article shows how an average person can attain $484 million or retire 20 years early when using an ETFOptimize investment strategy. We even provide an interactive calculator for you to determine how much you can attain over time with our simple to use ETF-based signals servive.

We're pleased to inform you that this service is available to you now – provided by our Adaptive Equity Rotation (2 ETF) Strategy. Each day you put off of getting started with this service is a day in which you will not be compounding your savings at such a high rate.   This strategy is currently our highest-performaning strategy!


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Turning Losses Into Gains

Outperformance is nothing if it isn't accompanied by downside protection when the market begins to slide. After all, who wants a very aggressive investment that produces a credible performance when the market is rising – but loses it all (and perhaps more) when conditions turn negative? Fortunately, both of the components of this strategy provide ample protection from loss when the market is declining. As a stand-alone strategies, neither has lost money in any year and the S&P 500 component significantly outperforms the market. First of all, neither the S&P 500 component nor the Fixed Income component has ever lost money during any year when operated separately, as stand-alone single-ETF strategies, and they provide an even more robust investment approach when the two are combined into this Asset Allocation 2-Asset, 2-ETF strategy.

When confronted with challenging economic or market conditions that cause the typical stock portfolio or mutual fund to go into decline, this strategy's S&P-500-based component first switches to a 'risk-off' asset, in the form of the iShares 1-3 Year Treasury ETF (SHY), then to an inverse ETF - the ProShares -1x Short S&P 500 ETF (SH). If underlying conditions continue to deteriorate, the strategy will switch to the ProShares -2x UltraShort S&P 500 ETF (SDS) to make profits as the market declines. Meanwhile, the Fixed Income asset is always rotating to the fixed income ETF that is optimum for conditions.

Performance During the Financial Crisis

As an example of how this strategy transforms losses into gains, the best example we can provide is during the Financial Crisis, when the S&P 500 plummeted from late 2007, through all of 2008, and into the first quarter of 2009, losing -56% of its value. During this same period, our eq-2 Strategy's nearest benchmark, a 70/30 S&P 500/Total Bond combination (SPY/BND) lost -40% – less than the S&P 500 because it is a combination of two uncorrelated asset classes (an advantage our strategy also puts to use). Meanwhile, our Asset Allocation-2-2 Strategy consistently switched to the two optimum ETFs four all conditions, and outperformed its benchmark by huge margins.

These performances are shown in Chart A below (left side) which presents the developments from the December 10, 2007 high until the Financial Crisis nadir on March 9, 2009. The strategy produces an outperformance of 105% through the low of the Financial Crisis.

On the right side, Chart B below shows the strategy's performance from the December 2007 high, through the Financial Crisis low in March 2009, and progresses until some three years later when the benchmark finally recovers its -40% loss during the Crisis. By the time the SPY/BND 70-30 benchmark gets back to breakeven (0%), our Asset Allocation 2-2 Strategy would have produced a return of 150% for you!


  Financial Prices -  until benchmark recovered losses

Financial Crisis Nadir: From the December 2007 high just before the Financial Crisis to its low on March 9, 2009, this strategy's benchmark, a 70/30-weighted S&P 500/Total Bond Market ETF (SPY/BND) Combination lost -39.63%. In fact, it lost less than the S&P 500 itself (-56%) because of its combination of two uncorrelated asset classes. However, during the same period, our Asset Allocation 2-2 Optimal S&P 500-multi/Optimal Fixed Income (2 ETF) Strategy produced an exceptional return of 65% - a 105% outperformance!

  Financial Crisis & Recovery: As shown by the chart to the left, this strategy's benchmark (a 70/30-weighted S&P 500/Total Bond Market ETF (SPY/BND) combination) descended from its December 2007 high (just before the Financial Crisis) through its low on March 9, 2009, it lost -40%. Then, as shown in the chart above, the benchmark began to gain ground and over a total of 36.5 months (until January 1, 2011) it finally recovered that -40% loss. However, during that same timeframe, our Asset Allocation 2-2 Dynamic S&P 500/ Fixed Income (2 ETF) Strategy produced a return of 150%!  Which investment would you prefer to use?


The eq-2 Strategy, instead of declining for 18 months as the vast majority of stocks did during worst stock market selloff in a generation, instead was gaining ground during that entire time, as you can see by the chart on the left, above. As shown by the chart on the right, you would have avoided that entire selloff and continue to make money (and a 149.9% return) for 36.5 months as this strategy's benchmark was just getting back to breakeven.

1) Eliminating significant market declines is the first of several ways this ETFOptimize strategy produces significant outperformance. By minimizing or eliminating drawdowns, as shown by the chart above left, with this strategy you can eliminate the many months or years required to recover your losses caused by regular declines. Eliminating all that time required just to get back to 0% would be an enormous advantage. However, this ETFOptimize strategy goes even further – in two additional important ways:

2) It makes money even as the S&P 500 is declining. By dynamically switching to an S&P 500 inverse ETF (SH) when economic and market conditions are significantly unfavorable – or to the 2x-leveraged S&P 500 Inverse ETF (SDS) when conditions are dramatically negative, this strategy produces significant gains as S&P 500 stocks decline.

3) In the opposite direction, when the S&P 500 is rising and economic and market conditions are highly favorable, this strategy will switch to a 2x-leveraged long S&P 500 ETF (SSO), thereby doubling the return of the market whenever robust rallies take place.







Consistent Annual Profit and Outperformance

As millions of other investors and their advisors become concerned about the regular weakening of economic indicators or a directionless market, not knowing what the future holds and if the market is about to fall off a cliff, subscribers to the Asset Allocation 2-2 Combo Strategy can simply ignore all that noise. The eq-2 strategy assesses as many as 28 different data sets each weekend and determines the optimum ETF to own for any type of condition that can affect the market (referring to both common stocks, precious metals, and fixed income assets).

Our Asset Allocation 2-2 Combo Strategy provides subscribers with profits every single year, regardless of the performance of the economy or the stock market. This may be the most impressive benefit of all for those who lived through the Financial Crisis of 2008-2009 and lost a substantial amount of money (or felt the intense stress of a potential loss): i.e., the eq-2 Strategy has never experienced a money-losing year!  Furthermore, the strategy has outperformed its benchmark every single year since inception.

The charts below provide both a numeric and a bar chart presentation of the annual performance of the eq-2 Strategy since its inception in 2006.

The 'Performance by Calendar Year' chart below shows...

• this model's annual performance on the top line,
• the performance of the benchmark in the middle line, and the
• the 'excess' performance or outperformance of this strategy over its benchmark on the bottom line.



The 'Yearly Returns' bar chart below shows a graphical interpretation of the data above. Notice from the strategy's performance bars (red) that it has been profitable every year (indicated by all red bars being above 0%), and in every year, the strategy (red bars) outperformed its benchmark (indicated by red bars being above the blue bars), most years significantly. Of course, 2018 is still underway and we're confident that, by the end of the year, it will show the same profitability and outperformance characteristics as all the other years.


The Asset Allocation 2-2 Strategy's annual performance is shown by red bars and its benchmark return is shown by blue bars.


Demonstrated graphically by the bottom window and numerically by the top window, you can see that the eq-2 Strategy has been profitable every year since its inception (indicated by red bars above 0%), and it also outperformed its benchmark every year (indicated by red bars extending above blue bars).

The outperformance was fractional in 2006 and 2007, but very significant in 2008 (outperformance of 52.16%), 2009 (29.34%), and in 2013 when the strategy produced a gain that was 34.89% more than its benchmark.

While 2018 is not yet showing those same characteristics, we are confident that by the end of the year it will. Following the very significant run-up from late-2016 through 2017, the market has experienced a very long consolidation through the first half of 2018. We expect that consolidation to end soon and this strategy will begin outperforming, as always. However, subscribers to this approach should be aware that in long, sideways consolidations of the S&P 500, since its primary performance drivers are focusing on the S&P 500, this strategy has no clear way to produce gains. However, you should also keep in mind that the 2018 consolidation of more than six months is extremely unusual.


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Based on Monthly Data
One of the most important measures of an investment approach is its 'Risk-Adjusted Return,' which we usually assess from the Sharpe Ratio or the Sortino Ratio. These metrics show the ratio of an investment's performance to its volatility (aka, 'risk'). Notice the dramatic outperformance of this strategy when those two ratios are compared to the strategy's benchmark - the buy-and-hold of a 70%-30% weighted SPY/BND ETF combo. Since the inception of this strategy, the Sharp Ratio of the SPY/BND benchmark is 0.71 while its Sortino Ratio is 0.91 – compared to ratios of 1.56 and 2.22 for this strategy. You can also see from the last entry at the bottom of the table showing Alpha % (average annual outperformance of an investment above the performance of its benchmark) that this strategy outperforms its benchmark by an average of more than 20% per year. The actual, year-by-year outperformance is shown in the "Performance by Calendar Year" table (above).

Risk Measurements



Strategy Universes

This two-component Asset Allocation strategy combines our S&P 500 Bull/Bear (1 ETF) Strategy and our Adaptive Fixed Income (1 ETF) Strategy. Combining the two strategies with a weighting of 70-30Each component has a separate universe with five ETFs in the S&P 500 universe and 53 ETFs in the Fixed-Income universe. We make sure that each ETF in each universe have ample daily volume to accommodate individual investors with a fairly large portfolio of up to $20 million. If you are investing more than $20-$30 million or more in any one ETF transaction, or are an investment advisor, please contact us for additional information.


The Dynamic S&P 500 Bull/Bear Component selects from a five-ETF universe that consists of the following assets:
• ProShares Ultra (2x) S&P 500 ETF (SSO) - 2x-leveraged for robustly bullish conditions
• SPDR S&P 500 ETF (SPY) - Tracks the S&P 500 index during bullish conditions (no leverage)
• iShares 1-3 Year Treasury Bond ETF (SHY) - risk-off/flat for sideways and unpredictable conditions
• ProShares Short (-1x) S&P 500 ETF
(SH) -  inverse ETF ( tracks the opposite of the S&P 500 index) for bearish conditions
ProShares UltraShort (-2x)
S&P 500 ETF (SDS) -  2x inverse for robustly bearish conditions

Note: Because they are so widely traded, the S&P 500-component ETFs can accomodate virtually any size of investment.


The Adaptive Fixed Income Component selects from a 53-ETF universe consisting of bond ETFs, Treasury ETFs, and other fixed-income ETF assets.

The tickers for the 53 fixed income ETFs are as follows:



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