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2024 in Review

This commentary highlights EIA’s strong 2024 performance, driven by the IFED strategy, which uses Federal Reserve signals to adapt to market conditions. Despite the dominance of mega-cap stocks like the “Magnificent Seven,” EIA’s Nasdaq IFED indexes demonstrated robust long-term outperformance. With over $500 million in assets tracking its indexes, EIA is poised for continued success in 2025.


2024 was another fantastic year for the mega-cap marvels and for EIA. The “Magnificent Seven,” Apple, Nvidia, Microsoft, Amazon, Alphabet, Meta and Tesla, averaged gains of approximately 63% during the year and accounted for more than half of the S&P 500’s 2024 gain. As shown in Exhibit 1, Nasdaq IFED-L, which is EIA’s large-cap equity index, nearly matched the S&P 500’s performance despite its underweight position in the Magnificent Seven.


Nasdaq IFED-L produced a return of 23.6%, only slightly underperforming the S&P 500 return of 25.0%. In contrast, Nasdaq IFED-LV, which is EIA’s large-cap, low volatility equity index, slightly outperformed its benchmark, producing a return of 14.9% versus 14.3% for the benchmark. Low volatility indexes limit their investment universe to stocks that are largely devoid of speculative components, which explains the difference in relative performance for the two indexes. That is, the IFED approach yielded superior performance in 2024 once the speculative return element was removed.


Exhibit 1. Nasdaq IFED Index Performance for 2024

The IFED strategy, which underlies EIA’s investment approach, uses twelve firm financial characteristics to select stocks that are best positioned for prevailing market conditions. The twelve IFED metrics represent firm fundamentals and are devoid of speculative elements and emotional considerations. Speculative elements are a significant contributor to glamour stock valuations. For example, the average PE ratio for the Magnificent Seven stocks is nearly 50, which suggests investors are betting on continuing phenomenal earnings growth for the seven. Glamour stocks are under-represented in IFED portfolios regardless of the prevailing market environment.


For the past two years, glamour stocks have captured investor attention, and their prominence has been on full display. For example, two years ago the Magnificent Seven stocks represented 20% of S&P 500 valuation and now represent over one-third of the index’s value. When factors beyond firm fundamentals drive stock returns, the IFED portfolios can fall short of their benchmarks. Fortunately, history has shown that long-term stock performance is determined by firm fundamentals. The IFED strategy extends this doctrine by selecting stocks with solid fundamentals that are optimally aligned with prevailing market conditions.


To examine the robustness of the IFED strategy, the next section considers each index’s performance over a multi-year period. Specifically, the performance for Nasdaq IFED-L and Nasdaq IFED-LV is evaluated since their respective launches.


Live Performance of Nasdaq IFED Indexes

In the past five years, EIA has launched two customized equity indexes that target alternative investment styles. Nasdaq IFED-L was launched in June 2020 and Nasdaq IFED-LV was launched in July 2022. Each index is customized regarding liquidity and concentration of sector and individual stock holdings. The post-launch performance of Nasdaq IFED-L is presented in Exhibit 2.


Since its June 9, 2020 launch, Nasdaq IFED-L has outperformed the S&P 500 by 6.2% per year, which is a noteworthy accomplishment given the extraordinary economic developments during this 55-month period. Post index launch, the economy has experienced stock market extremes and divergent Federal Reserve policies ranging from constrained to accommodating, not to mention the unprecedented gains of the mega-cap marvels. Since launch, the chronology for the market has been a strong market recovery facilitated by the waning pandemic, followed by a market correction due to fears of inflation and rising interest rates, which was again followed by a recovery due to resumed economic stability and falling interest rates.


Across these diverse market variants, Nasdaq IFED-L outperformed its benchmark and competitors. During short intervals when the index fell short, its underperformance was limited, whereas the outperformance produced by Nasdaq IFED-L was robust when normal return patterns prevailed. EIA designed the IFED strategy to take advantage of long-term return patterns associated with changing market conditions, while limiting downside risk when unusual return drivers prevailed. Thus, the strong consistent performance of the IFED indexes matches the strategy’s design.  


Exhibit 2. Relative Performance Since Nasdaq IFED-L Launch

Exhibit 2 shows the total return of Nasdaq IFED-L relative to its benchmark and prominent competitors since its launch nearly five years ago. Over this period, Nasdaq IFED-L produced a total return of 129.3% versus 96.7% for the S&P 500. The exhibit establishes Nasdaq IFED-L’s superiority during this tumultuous period as it matched the highest return cyclical index. Nasdaq IFED-L outperformed all but one index by avoiding the boom-and-bust cycles exhibited by most investment strategies. IFED portfolios adjust composition to maintain the appropriate alignment between portfolio holdings and market conditions, which contrasts sharply with most investment styles that maintain static exposures to particular factors. In essence, the IFED strategy applies a multi-faceted investment style that adjusts to changing market conditions.


The best performing index over the period, the S&P 500 Momentum index, benefitted over the past few years from the extraordinary performance of the mega-cap marvels, which exhibited unprecedented mutual performance trends. Such trends are atypical for a group of diverse stocks and are unlikely to be repeated in future years. Does it seem reasonable to expect the Magnificent Seven to average a 63% annual return going forward?


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 has outperformed its benchmark, the S&P 500 Low Vol index by 6.8% per year. During this 29-month period, Nasdaq IFED-LV returned 38.0% versus 20.3% for its benchmark. In addition, Nasdaq IFED-LV significantly outperformed the other low risk alternatives as set out in Exhibit 3.


Exhibit 3. Relative Performance Since Nasdaq IFED-LV Launch

As noted previously, the stocks included in low volatility indexes derive their value based on firm fundamentals, and therefore, their returns are largely devoid of speculative components and emotional considerations. Hence, the strong relative performance of Nasdaq IFED-LV offers strong validation for the efficacy of the IFED strategy. The evidence confirms the strategy’s ability to capture long-term returns that are based on firm fundamentals and maintaining the appropriate match between portfolio holdings and market conditions.


IFED Market Environments in 2024     

During 2024, the IFED strategy identified one shift in the market environment, from “Restrictive” to “Expansive,” which happened in September. The typical number of shifts prompted by the IFED Model is one or two per year, so 2024 was a typical year with respect to fundamental adjustments in market conditions. With the September move, the Fed signaled a shift from prioritizing price stability to a focus on maintaining economic growth. The Fed move prompted the IFED strategy to adjust portfolio composition from stocks positioned to prosper under the old environment to those postured for the new environment.


The IFED strategy classified the market environment for the first nine months of 2024 as “Restrictive” based on the Fed’s focus of keeping inflation under control. With the shift to an “Expansive” classification, the IFED methodology shifted toward favoring neglected stocks, with strong profit margins and growth potential. Nasdaq IFED-L’s composition at the end of 2024, illustrated by its top-ten, year-end holdings, is shown in the left-most columns of Exhibit 4 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 right-most columns of the exhibit present the year-end sector weights.


Exhibit 4. Nasdaq IFED-L Top Ten Holdings and Sector Weights, Yearend 2024

Exhibit 4 confirms that the portfolio is heavily weighted toward Information Technology, Consumer Discretionary and Financial firms. Such firms rely on consumer spending, a growing economy, and greater availability of funding in the financial markets. The September rebalance successfully transitioned the portfolio to a composition that favored firms positioned to prosper in a falling interest rate environment with increased consumer and business spending.  


It is worth noting that while Information Technology (IT) comprises Nasdaq IFED-L’s largest sector holding, none of the technology behemoths is represented in the top-ten holdings. Instead, less prominent firms such as Dell, AppLovin, and Qualcomm represent the IT constituents included in the top ten.

 

The composition of Nasdaq IFED-LV at year end 2024 is reflected by its top-ten holdings as shown in Exhibit 5. Given the prevailing Expansive environment, the index favored low volatility firms that had opportunities for growth.

 

Exhibit 5. Nasdaq IFED-LV Top Ten Holdings and Sector Weights, Yearend 2024

As expected, relative to Nasdaq IFED-L, Nasdaq IFED-LV is weighted more heavily toward Consumer Staples and Health Care firms. Furthermore, the index is more broadly distributed across the eleven sectors providing it with more diversification and stability. Note, the constituent firms in the top-ten holdings are largely established firms that are leaders in their market niche. In contrast to the typical low volatility index, however, the included firms offer greater growth prospects in an economy entering a period of decreasing interest rates and increased consumer and business spending.


Other IFED Indexes

In addition to EIA’s two customized indexes described above, EIA tracks performance for several non-customized portfolios that target different market-cap segments. 2024 represents the fifth full year that EIA has produced monthly updates of performance for these four IFED prototype portfolios. Exhibit 6 presents back-tested annualized performance for these IFED portfolios 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 exceeding two years.


Exhibit 6. Comparative Returns of IFED Strategy by Market Cap (through December 2024)

As noted previously, the IFED strategy occasionally underperforms during periods when speculation and emotional forces drive returns. Such was the case during 2023 and 2024 when the mega-cap marvels thrived. Note that the mid-cap and small-cap IFED portfolios, which exclude mega-cap stocks, demonstrated strong outperformance during these two years. The consistent outperformance of these two portfolios, which exclude mega-cap stocks, supports the long-term robustness of the IFED strategy.


Celebrating 2024 and Looking Forward to 2025

2024 was a year to celebrate for EIA due to both index performance and investor recognition. During the year, assets tracking IFED indexes increased to more than $500 million. Our solid track record of performance and compelling theoretical foundation gained considerable traction among investors during the year. Given our momentum from 2024, we look forward to great success for EIA and our clients in 2025.

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.

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