After many months of anticipation, the Federal Reserve finally lowered its policy interest rates in September. The question for investors now is, “is my portfolio positioned to prosper in the new environment?” While identifying a shift in Fed policy is important, the more crucial consideration for investors is determining a portfolio composition that aligns with the new market environment. The EIA team devoted over 30 years in developing an investment strategy that shifts portfolio holdings to keep portfolio composition matched with market conditions. The IFED strategy that the team developed meets the rigors of academic scrutiny and passes proof-of-concept in the market with its live Invest with the Fed (IFED) indexes.
Given the Fed’s dramatic shift from a restrictive (rising rate, tight-money policy) to an expansive policy of lower rates and increased fund availability, investors should anticipate a corresponding substantial shift in portfolio holdings. The IFED indexes shift portfolio composition when the Fed signals a change in its operating policy. When such a change is signaled by Fed actions, each IFED index is adjusted such that its composition fits with the new market environment. The strategy uses 12 firm financial metrics to identify stocks that best align with a newly signaled environment.
On September 26, 2024, the IFED indexes were reallocated to match the newly signaled market environment. On average, IFED index holdings have been updated slightly less than twice per year to maintain alignment between index holdings and market conditions.
IFED Index Performance – Full Period and Live Period
EIA’s first two customized indexes, Nasdaq IFED-L and Nasdaq IFED-LV have been publicly available since June 9, 2020, and July 19, 2022, respectively. Nasdaq IFED-L is a large-cap, US equity index, whereas Nasdaq IFED-LV is a large-cap, low volatility US equity index.
Exhibit 1 presents performance data for Nasdaq IFED-L (Panel A) and Nasdaq IFED-LV (Panel B). Returns are reported through the last complete market environment, which ended with the September 26 rebalance. Data is reported for the full period and since each index was launched. The full period starts in January 1999, and thus, includes back-tested data.
Exhibit 1: Nasdaq IFED Index Performance (through September 26, 2024)

The performance reported in Exhibit 1 supports several important conclusions as follows:
The indexes produced large annual alphas during both the full period and since launch (the live period). All four alphas represent a superior return of at least 3.7% per year.
The similarity in alphas during the two periods and across the two indexes supports the robustness of the IFED strategy.
The % of months with positive alphas indicate that the superior performance of the IFED indexes was not driven by a few extreme monthly return observations, but rather resulted from a systematic pattern.
The data supports EIA’s promotion of the IFED strategy as a long-term strategy intended to capture return patterns that generally prevail but do not appear each month.
In general, the performance is consistent with the IFED strategy design, which is to prosper when normal return patterns prevail while limiting underperformance when unusual factors drive returns. For each index, outperformance was not an assured monthly observation because of the myriad of unexpected risk factors that drive returns over short periods of time. When normal return patterns prevailed however, the indexes prospered. For example, in the 54% and 55% of cases when Nasdaq IFED-L produced positive alphas, the level of outperformance was prominent enough to produce the sizeable average alphas reported. Likewise, the underperformance when unusual factors drove returns did not offset the superior outcome when normal patterns prevailed.
Nasdaq IFED-L Index Composition
Nasdaq IFED-L is comprised of those large-cap U.S. stocks with the highest IFED Scores, i.e., the stocks best positioned to prosper in prevailing market conditions. The index’s top ten holdings at the end of September 2024 (Post-Shift) and at the time of the prior rebalance (Pre-Shift) are shown in Exhibit 2.
Exhibit 2. Nasdaq IFED-L Largest Holdings

Nasdaq IFED-L has a wide dispersion in index holdings and limited concentration, which results due to the reliance on 12 diverse financial metrics in selecting stocks. The largest post-shift allocation is only 3.66% and the top 10 holdings comprise less than 30% of the total allocation. The largest holding in Nasdaq IFED-L is Booking Holdings, followed closely by Dell Technologies.
Interestingly, five of the largest holdings appear in both the post- and pre-shift portfolios. The 12 financial metrics utilized in the IFED strategy include several measures that reflect firm financial strength and valuation. Thus, those firm features are favored by the strategy regardless of the market environment and help explain the consistency of holdings across the two environments. That is, the five firms that remained across the two environments exhibited strong financials and attractive valuations at the start of both the pre- and post-shift periods.
Exhibit 4 shows Nasdaq IFED-L’s sector composition post- and pre-shift. Recall that stock selection for the IFED indexes is sector agnostic since constituents are selected based on 12 individual firm features.
Exhibit 4. Nasdaq IFED-L Sector Allocation

The largest change in sector allocation occurred for the Financial sector, which witnessed a substantial reduction of 9.04% in allocation. The large allocation change resulted primarily due to a shift in strategy focus from firms with strong cash positions and solid balance sheets (favored during restrictive market environments) to high profitability firms with growth opportunities (favored during expansive environments). The largest increase in allocation (+8.27%) occurred for the Consumer Staples sector. As noted, the IFED strategy focuses exclusively on individual firm features. Thus, the appropriate interpretation of these observations is that after the shift in environment, firms in the Consumer Staples sector, relative to firms in the Financial sector, exhibited features that were better aligned with the new market conditions.
Despite Nasdaq IFED-L’s rather large allocation to IT stocks, the IFED strategy tends to underweight “glamour” companies, such as the Magnificent 7. The 12 metrics favor firms with attractive valuations and strong financials, which diminishes the role that speculative elements and emotion play in determining price. Therefore, the major IT holdings in Nasdaq IFED-L are Dell Technologies and Qualcomm, rather than Nvidia, Meta, and Microsoft. For example, the average P/E ratio for Dell and Qualcomm is 23 versus an average of 44 for Nvidia, Meta, and Microsoft.
Avoiding the speculative/emotional elements of stock price can harm relative performance during periods when investor euphoria drives prices; however, the EIA team believes that selecting stocks based on valuation fundamentals is the better approach in the long run. This belief is supported by the superior live and back-tested performance for the IFED indexes, which is reported in Exhibit 1.
Nasdaq IFED-LV Index Composition
The top ten holdings and sector composition for Nasdaq IFED-LV are shown in Exhibit 5, Panels A and B, respectively. Nasdaq IFED-LV is comprised of the 75 large-cap, low volatility US stocks with the highest IFED Scores.
Exhibit 5: Panel A. Nasdaq IFED-LV Largest Holdings

Exhibit 5: Panel B. Nasdaq IFED-LV Sector Allocation

As with Nasdaq IFED-L, Nasdaq IFED-LV reduced its allocation to the Financial sector. The index also reduced its allocation to Industrials to a lesser extent. Consumer Staples, IT and Consumer Discretionary claimed the major increases in exposure. After its most recent rebalance, the index has a diverse collection of stocks in its top ten holdings, which contrasts with the pre-shift heavy emphasis on large financial firms. Currently, the largest holding is in eBay and it represents less than 4% of index holdings.
As indicated previously, the new expansive market environment favors firms with strong earnings ratios, attractive valuations, and growth opportunities. Many of the financial firms held previously rated well on dividend yield and balance sheet strength but ranked lower on growth opportunities.
Can Investors Capture Alpha in the Large-Cap Space?
The phenomenal growth in the AUM invested in large-cap index funds, such as S&P 500 funds, suggests that many investors have accepted that the answer to the above question is an emphatic, “no.” Based on over 30 years of research, the EIA team devoted several years to developing two indexes that were designed to tackle this question head on. The EIA team used their academic research to design two IFED large-cap indexes that rely on well-established return patterns. The sound economic foundation underlying the indexes is supported by the observation that both indexes produce significant and comparable positive alphas across the back-tested years and years of live performance. Nasdaq IFED-L has a live track record of over 4 years and has outperformed its benchmark by 3.67% per year. Likewise, Nasdaq IFED-LV’s track record extends for more than 2 years, and in that time, it has outperformed its benchmark by 6% per year.
There is a significant challenge associated with capturing alpha with large-cap firms, and especially, in the large-cap, low-volatility space. Typically, investors in this space have acquiesced to the idea that they are relegated to diminished returns in exchange for stability. The EIA team created Nasdaq IFED-L and Nasdaq IFED-LV to counter this view. Investors in these two indexes are invested in below average risk portfolios; however, portfolio composition is varied to take advantage of individual firm alignment with prevailing market conditions.
We believe the performance and economic principles of the IFED indexes make a compelling case that the answer to the above question is, “yes.” Generating a positive alpha in the large-cap space, however, is not an easy task. It requires an approach that shifts portfolio composition at the right time and adopts the appropriate exposures.
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