Using Fed Policy Signals to Capture Alpha: The IFED Strategy

Synopsis


This article provides insight to the origins of the IFED strategy and its efficacy. The IFED strategy is rules-based and represents a unique combination of top-down and bottom-up investment approaches. The strategy relies on twelve firm-specific financial metrics to select stocks, which integrates a bottom-up dimension into the strategy. The weights applied to the twelve metrics, however, are conditional on the market environment, as defined by gauging Fed policy signals. Relying on Fed policy signals to guide stock selection introduces a top-down dimension that makes the IFED strategy dynamic and forward looking.


Combining the two dimensions into an executable investment approach led to the launch of the Nasdaq IFED Large-Cap US Equity Index (Nasdaq IFED-L) on June 9, 2020. Since its June 2020 launch, Nasdaq IFED-L has been the best performing large-cap US equity index, producing a total return of 49.99%. Furthermore, the index has produced an average alpha (vs the S&P 500) of 7.61% per year over its entire backtested history from January 1, 1999 through August 31, 2022.


Economic Index Associates (EIA) is excited to partner with Nasdaq in promoting the IFED strategy to the global investment community. We look forward to future collaboration on a suite of indexes that apply the IFED approach.


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