Since its launch two years ago, the IFED Large-Cap US Index (IFED-L) has been the best performing large-cap US equity index, producing a total return of 53.07%. By repositioning index holdings to align with changing market conditions, IFED-L outperformed other indexes over a very challenging market environment that included several historic events, including a pandemic, record inflation, Russia’s invasion of Ukraine, and historic supply-chain disruptions.
The IFED methodology selects and weights stocks based on their ability to prosper during prevailing market conditions. The methodology relies on a combination of individual stock metrics and signaled shifts in Federal Reserve policy to guide decisions regarding portfolio composition. IFED indexes consist of approximately 75 stocks and are rebalanced about twice per year on average.
The efficacy of the IFED approach is supported by IFED-L’s 21.84% total alpha (vs the S&P 500) since the index was launched on June 9, 2020. Furthermore, as illustrated in the following graph, the 53.07% return over this two-year period far surpasses that of the other prominent large-cap indexes.
* Please note that many of the returns presented here are sourced from ETFs tracking these indexes due to various constraints accessing index data
Performance YTD in 2022 (as of June 8, 2022)
IFED-L’s superior performance has continued, as it maintained its top position YTD in 2022, producing a total YTD return of 0.80% vs -13.07% for the S&P 500. This consistency of performance supports the strategy’s overall robustness as the two-year period represents a favorable period for the market, whereas, so far, 2022 has been an unfavorable market environment. Furthermore, the consistency of outperformance compares favorably with the other indexes. For example, the second-best performer over two years (S&P 500 High Beta), drops to thirteenth best in YTD performance.
Performance Attribution
With 30+ years of published research, EIA’s founders are the pre-eminent authorities on the association of Fed policy signals and security returns. The founders designed the IFED strategy to produce strong positive alpha in the long-term while limiting investors’ downside risk, thus, the strategy’s long-term performance is paramount. With this in mind, the overall effectiveness of the IFED methodology is supported by IFED-L’s average annual alpha (vs the S&P 500) of 7.75% in back-tested performance over the period January 1, 1999, to May 31, 2022.
Both sector and factor attribution analyses (see charts below) confirm that IFED-L’s alpha is sourced from its stock selection process, namely the use of 12 firm-specific metrics. To seek outperformance and avoid holding a portfolio that has become out-of-favor, the IFED strategy relies on Federal Reserve policy signals to assign appropriate weights to the twelve metrics.
About EIA
Economic Index Associates (EIA) is a developer and licensor of active index strategies that are replicable, investable, rules-based and transparent.
EIA’s three founders (Robert Johnson, Gerald Jensen and Luis Garcia-Feijoo) are the authorities on the association of Fed monetary policy with security returns – combined they have published over 200 academic articles, which have over 10,000 citations. The basic premise of their original research is captured in their book - Invest with the Fed (McGraw-Hill, 2015).
Leveraging its founders’ extensive research, the “Invest with the Fed” (IFED) methodology uses Fed policy signals and firm fundamentals to guide stock selection. The IFED strategy is a dynamic approach that selects portfolios that align with whatever market environment is signaled by Federal Reserve policy actions.
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