Posted: January 16, 2023
Was 2022 a year of the unopened envelope syndrome for you? Behavioral psychologists have identified a phenomenon that during periods of poor market performance investors tend to shred their portfolio statements without opening them. This action stems from a desire to avoid regret. People in general have aversion to bad news, so if you can avoid staring it in the face, why not.
It may be a sore subject, but how did your portfolio perform in 2022? For most investors, 2022 will go down as a year to forget. For EIA however, 2022 was a successful year with our two Nasdaq IFED indexes navigating the market turmoil to end the year significantly beating their benchmarks.
Exhibit 1. Nasdaq IFED Index Performance for 2022
 The Nasdaq IFED US Large-Cap Low Volatility Index (Nasdaq IFED-LV) was launched on July 19, 2022; returns prior to that date are back-tested using the same index methodology.
During the year, the crucial role that the Federal Reserve plays in the financial markets was on full display. The market’s emphasis on Fed monetary policy further justifies EIA’s reliance on Fed announcements and actions in guiding our investment approach. The IFED strategy is unique with its rules-based approach that uses Fed policy signals to identify stocks with optimal characteristics for prevailing market conditions.
For the year, the two Nasdaq IFED indexes were the top performers of the prominent factor and market indexes as shown in Exhibit 2 below. This performance was achieved during a year with a variety of Fed policy moves and market developments, which supports the robustness of the IFED strategy.
Exhibit 2. Nasdaq IFED Relative Performance for 2022
Live Performance of Nasdaq IFED Indexes
Nasdaq IFED-L Live Performance
Since its June 9, 2020 launch, Nasdaq IFED-L has outperformed the S&P 500 by 28.32%, which is a noteworthy accomplishment given the extraordinary economic developments during this 31-month period. Post index launch, the economy has experienced stock market extremes, a strong market recovery facilitated by the waning pandemic, followed by a market correction due to fears of inflation and rising interest rates. Furthermore, Fed policy has shifted from extremely accommodative to very tight during this time frame. Despite the diverse market variants, the IFEDstrategy consistently outperformed the market in both its advancing and declining stages.
Exhibit 3 shows the total returns of Nasdaq IFED-L relative to other prominent indexes since it was launched nearly three years ago. The exhibit confirms that Nasdaq IFED-L has been by far the best performer during this tumultuous time period.
Exhibit 3. Relative Performance Since Nasdaq IFED-L Launch
Nasdaq IFED-LV Live Performance
On July 19, 2022, EIA launched its second index, the Nasdaq IFED US Large-Cap Low Volatility Index (Nasdaq IFED-LV). Since launch, Nasdaq IFED-LV outperformed its benchmark, the S&P 500 Low Vol index by 4.74%. During this approximate half-year period, the S&P 500 Low Vol returned 4.53% versus 9.27% for Nasdaq IFED-LV.
Nasdaq IFED-LV’s strong performance since launch is typical for a low volatility product during a down market. Nasdaq IFED-LV, however, outperformed other low risk alternatives by a large amount as set out in Exhibit 4. Furthermore, EIA research shows that, relative to other investment approaches, the IFED strategy is much more effective at capturing upside potential without subjecting investors to additional downside risk.
Exhibit 4. Relative Performance Since Nasdaq IFED-LV Launch
IFED Market Environments in 2022
During 2022, the IFED strategy identified one shift in the market environment, from “Expansive” to “Restrictive,” which happened in March. The typical number of shifts prompted by the IFED Model is between one and two per year, so 2022 was not particularly unusual with respect to fundamental adjustments in market conditions. With the March shift, the IFED strategy adjusted portfolio composition from stocks positioned to prosper under the old environment to those optimally positioned for the new environment.
The IFED strategy classified the market environment at the beginning of 2022 as “Expansive” even though many market pundits felt the Fed had shifted its intentions toward tightening months earlier. With the Expansive classification, the IFED methodology favored neglected stocks, stocks with strong profit margins and those stocks with growth potential. At the time, most pundits were promoting a strategy to preserve value by holding blue-chip stocks with limited growth potential. Nasdaq IFED-L’s composition at the beginning of 2022, illustrated by its top ten holdings before the March shift, is shown in the left-most columns of Exhibit 5 below. The top ten holdings reflect the distinct features called on by the IFED methodology to best position the portfolio for success during the Expansive environment.
The IFED strategy identified a shift in mid-March from an Expansive to a Restrictive environment. With the shift to a Restrictive classification, Nasdaq IFED-L’s portfolio holdings adjusted substantially. The new environment favors firms with solid balance sheets, market scale and attractive valuations. The portfolio’s new composition is reflected by the top ten holdings after the March shift, which are shown in the right-most columns of Exhibit 5.
Exhibit 5. Nasdaq IFED-L Top Ten Holdings Before and After March Environment Shift
Exhibit 5 confirms that the pre-shift portfolio was heavily weighted toward firms relying on consumer discretionary spending and a growing economy. The March rebalance successfully transitioned the portfolio to a composition that favored firms with market scale that were positioned to prosper in a rising interest rate environment. Nasdaq IFED-Lproduced sizable positive alpha in each of the market environments in 2022; however, the strategy was particularly effective in the pre-shift period (16.36% alpha pre-shift and 2.81% alpha post-shift).
The composition of Nasdaq IFED-LV when it was launched on July 19, 2022 is reflected by its top ten holdings as shown in the following exhibit. Given the Restrictive environment that existed at that time, the index favored low volatility firms that had scale and strong balance sheets.
Exhibit 6. Nasdaq IFED-LV Top-Ten Holdings when Launched
Other IFED Indexes
2022 represented the third full year that EIA has produced monthly updates of performance for four IFED prototype indexes segmented across different market cap classifications. Exhibit 7 presents back-tested performance for these four IFED indexes across alternative holding periods. The robustness of the IFED strategy is supported by the observation that the strategy produced superior performance for the four market-cap classifications across all holding periods.
Exhibit 7. Comparative Returns of IFED Strategy by Market Cap (through December 2022)
Celebrating Our 2022 Performance and Looking Forward to 2023
For investors in the IFED strategy, 2022 represented another year of outperformance relative to the market benchmarks. The success of the IFED strategy in 2022 served to reward those EIA clients that chose to open the envelopes containing their performance reports. The EIA team looks forward to sharing another successful year with our clients in 2023.
 The Nasdaq IFED US Large-Cap Low Volatility Index (Nasdaq IFED-LV) was launched on July 19, 2022; returns prior to that date are back-tested using the same index methodology as the live index.  For further performance data for Nasdaq IFED-L and Nasdaq IFED-LV and information about EIA’s other indexes please visit our website