Economic Index Associates

Fact Sheet

1. What is Economic Index Associates?

Economic Index Associates, LLC (EIA) is a firm that creates investable indexes tied to macroeconomic indicators such as the IFED series of indexes that are based on Federal Reserve policy. EIA then licenses those proprietary, patent-pending indexes as the basis for financial products. EIA also produces security ratings based on its proprietary methodology and supporting data and analytics. With EIA’s services, clients have the ability to model customized portfolios using the EIA unconstrained IFED benchmark indexes for performance and risk measurement.

2. What is the story behind Economic Index Associates?

Economic Index Associates is the result of three decades of research by widely-published finance professors Robert Johnson, Gerald Jensen and Luis Garcia-Feijoo.  They developed an interest in Federal Reserve policy and how Fed decisions influence asset pricing while pursuing their PhD degrees. The three researchers meticulously documented how specific and identifiable Federal Reserve policy changes influence returns for a variety of asset classes and published the findings in prestigious academic and practitioner peer-reviewed journals. The basic premise of the original research is captured in their book - Invest With the Fed (McGraw-Hill, 2015).  Shortly thereafter, Robert Johnson met Albert Neubert, a globally recognized expert in the field of security indexes, at an investments conference. Neubert attended a presentation by Johnson that covered the findings in the newly released book. After reading the book and querying the researchers over the next year, he came to realize that the strategy could be adaptable to an index format.  Over the next 18 months, the team worked diligently to design an investment strategy that builds on the basic premise presented in but incorporates the team’s full research findings. The result of their efforts was the IFED Large-Cap US Equity Index™ (IFED-L), which is the first product under the banner, the IFED indexes.  The IFED indexes rely on a rules-based, transparent, replicable index methodology that has been thoroughly tested and independently verified by major global index providers. And as the saying goes, “let the performance speak for itself.”  The IFED-L index has produced superior risk-adjusted performance over its 21-year backtest history. 


3. What is EIA’s investment philosophy?

The EIA investment philosophy relies on being fully invested and strategically reallocating assets when economic conditions warrant. Underlying the EIA approach is the view that asset reallocations are optimal following a fundamental shift in economic conditions. A reallocation involves shifting asset weights to over-weight securities positioned to outperform in the new environment, while moving away from securities likely to underperform.


4. What are EIA’s core beliefs or guiding principles that inform its investment decision-making process? Why does EIA think some securities are mispriced and why does the firm believe that the IFED strategies will benefit from this mispricing? 

The investment strategy is based on the premise that macroeconomic forces significantly influence the relation between risk factors and security prices. Our macro approach focuses specifically on Federal Reserve monetary policy as implemented through the Fed’s actions on key interest rates. We believe that failure to consider the impact that the monetary environment has on security prices results in systematic mispricing of securities. For example, our research shows that a strategy that targets small, out-of-favor stocks is extremely successful when the Fed is following an expansive monetary policy but underperforms when monetary policy is restrictive. Thus, a smart-beta product that tracks small, out-of-favor stocks underperforms when monetary conditions are restrictive, whereas our strategy reallocates to a superior combination during that environment. Our strategy is more complex than this simple example as we consider several financial metrics in combination with monetary conditions. Our approach identifies the set of metrics that can be used to identify firms that perform best during each of the three alternative monetary environments classified under our approach.

5. Has EIA’s investment philosophy changed over time? What would cause it to change in the future?

The IFED investment philosophy has not materially changed over time. In effect, by its very nature, it adapts to changing market environments so there is no need to make adjustments to the “philosophy” or methodology. Our philosophy was developed based on 30 years of peer-reviewed research, in which we determined the most effective method of classifying the monetary environment and the superior set of financial metrics to employ. We believe strongly in the underlying economic basis of our approach. Therefore, the only potential change is a refinement of the model if our continuing research establishes that the inclusion of additional financial metrics will improve our selection process.

6. What makes EIA’s investment philosophy unique and distinguishes it from smart beta, factor and other types of investment strategies?

The IFED strategy is a unique active strategy captured in an index format. The strategy is distinctive in the marketplace as it introduces a dynamic dimension to the more traditional static approaches. It is well recognized that traditional strategies, such as smart-beta products, go through extended time periods in which they are in-favor and out-of-favor. Our research has established that these patterns of superior and inferior performance correspond closely with changes in the monetary environment. Therefore, our strategy shifts portfolio composition such that we target firms with financial metrics that are best positioned to prosper during the existing macro environment. The adaptability of the strategy allows it to identify the optimal set of securities in all market environments and through all market cycles.

7. What is the starting universe of securities for the IFED family of U.S. equity indexes? 


The starting universe uses a US equity database that includes all actively traded U.S. equities. The strategy can be easily modified to accommodate any broad equity market benchmark such as the Russell 3000 or Wilshire 5000 as its initial population. The methodology is also adaptable to subsets of the total US market and can employ the S&P 500, Russell 1000 etc as starting populations for investors seeking specific exposure to those segments.

8. Describe the IFED methodology. Starting with the initial universe of securities, what is the process for selecting and weighting securities? 

In creating our strategy, we developed a monetary policy measure that relies on a combination of Federal Reserve indicators to identify three distinct monetary policy environments – expansive, restrictive and indeterminate.   Importantly, our approach distinguishes between actual shifts in Fed Policy versus transient changes in interest rates. In developing our U.S. equity indexes, we applied exhaustive and extensive modeling to identify the critical financial metrics that influence company stock market performance during each of the three environments. There are twelve such metrics; however, the metrics are not common across the three environments. Essentially, the strategy relies on the observation that certain   financial metrics have a magnified or “leveraged” effect on companies’ stock prices during particular monetary environments but have little or no effect during other environments. Our process involves weighting those metrics appropriately to take the maximum advantage of the existing monetary environment. The twelve metrics are selected based on rigorous economic validation and empirical analysis of return sensitivities to Fed policy changes. One example of such a metric is a firm’s cash to total assets.  In an expansive environment, the cash holdings variable is assigned no weight as it is deemed relatively unimportant to stock performance during an expansive environment.  The economic rationale supports zero weight because the firm’s level of cash holdings is relatively inconsequential during periods when the Fed is signaling that funds will be readily available. In contrast, during a restrictive environment, the cash holdings variable is assigned substantial weight because the metric is expected to have an amplified effect during such environments.  That is, when the Fed signals that fund availability is going to be constrained in the future, having a higher level of cash holdings becomes much more beneficial for a firm. Several research analyses, performed by the EIA team and various academic researchers, confirm that the return sensitivities are consistent with the proposed economic rationales for each of the twelve financial metrics. For each environment, the metrics are scored and the population of companies in the universe is ranked based on total metric score.  Equities with insufficient liquidity and firms with insufficient financial data to derive the required metrics are eliminated from consideration.  In selecting our final sample and conducting the performance evaluation, we apply rigorous academic research standards to eliminate prominent data issues such as survivorship bias, selection bias and look-ahead bias.  

9. How do you ensure accuracy of the source data used in compilation of the IFED indexes?

Source data is carefully analyzed and checked for accuracy. The accuracy of our performance statistics are based upon our application of rigorous research standards that control for survivorship bias, selection bias and look-ahead bias. The performance results have been confirmed by independent third parties.  

10. Describe internal guidelines and constraints used to manage investment risk of the strategy.

Our strategy relies on twelve different firm metrics to select firms for the portfolio. Due to the unique nature of the metrics, the final set of selected firms have a broad array of financial characteristics.  Our tests of style concentration indicate that our strategy results in a portfolio that has a broadly diversified exposure across various risk factors and across industries. Furthermore, we can customize our weights to limit exposure to individual firms and industries/sectors per specific client request. For example, we could limit the investment in an individual firm to 4% and place a corridor percentage relative to the S&P 500 for sector weights. 

11. Can the IFED methodology be adapted to a population of ESG rated securities?

The IFED methodology is readily adaptable to a portfolio of ESG screened companies.  The same methodology used to arrive at the optimum selection of stocks in a particular economic environment would be applied to a starting population that is ESG screened.

12. How do you monitor and manage index portfolio exposure to your underlying model?

The strategy is a rules-based, transparent and replicable methodology and the model is designed to adjust the portfolio to the current identified macroeconomic environment. The IFED strategy continually scrutinizes firm financial metrics and the economic environment, so there is no need to apply additional portfolio monitoring to the process. the portfolio since it automatically adjusts as the model dictates.

13. Does the IFED index strategy tactically change its factor weighting scheme? 

The strategy does not depend on static factor exposures that require the execution of market timing decisions. Instead, we use a set of metrics that are employed in combination with three economic environments. The optimal set of financial metrics for each environment is a subset of the twelve metrics and is dependent on the existing environment.  As a result, the strategy adjusts to the current market environment without the need for decisions on “factor” exposures.

14. What is your process for sourcing and testing new ideas? How do you decide whether to include or remove a factor or make other changes to your model? 


The IFED strategy is a rules-based, transparent, replicable methodology.  The underlying premise for the strategy has been researched, tested and refined over a period of 30 years. We do not foresee any adjustments to the strategy in the near term. If, as a result of additional research, an adjustment is deemed necessary at some point, the modification will involve adding, eliminating or modifying the weight of a financial metric relative to the current set of twelve metrics. Just as the existing twelve metrics were selected, any new metric would need to be supported by robust academic research by EIA and other external researchers. In addition, the contribution of the metric would be confirmed by back-testing the metric’s influence on performance.

15. Can the strategy be customized? Which aspects are customizable?

The strategy is completely customizable. The IFED methodology can be treated as an overlay and used on the total US equity market or any subset thereof, including in combination with ESG screening.  As examples, the strategy can be used to create a long/short exposure, plus leverage, and with an options overlay.

16. What is the appropriate benchmark for this strategy? 

The IFED Large-Cap US Equity Index™ (IFED-L) should be benchmarked against a large cap index such as the S&P 500 or Russell 1000.

17. Which factor (style) tilts does this strategy have relative to its benchmark?


Over the long run, the IFED methodology creates a style or factor agnostic portfolio relative to the benchmark. By design, the IFED approach relies on allocating assets such that the portfolio is comprised of firms best positioned to prosper under the existing economic environment. Therefore, the portfolio’s factor exposures are conditional on the existing environment. A shift in the environment corresponds with new holdings that have unique factor exposures. 

18. Describe the circumstances or market conditions that would favor your investment strategy. When can it be expected to be out of favor or unrewarded?


A unique aspect of the IFED strategy is that it is never out of favor.   We utilize metrics to identify firms with features that leverage the firms’ exposures to the existing economic environment. When the economic environment shifts, our strategy rotates out of firms composed of features that are out of favor and rotates into firms that reflect in-favor features. Thus, over time, the strategy produces consistent out-performance with a very marginal increase in risk.

19. How many securities are currently in the IFED-L? What is the typical range in the number of securities?

The IFED-L portfolio currently contains 81 equities.  The size of the IFED-L portfolio has ranged 56 to 84 securities over the past 21 years. 

20. What is the rebalance frequency of the strategy?


The strategy is rebalanced for two reasons. First, the index portfolio is rebalanced when there is a signaled shift in monetary conditions.  Such a shift requires a major rebalancing to adjust the portfolio so that it reflects the optimal holdings and weights under the new Fed policy environment. Based on our methodology, there is a minimum of three months between rebalancings that occur due to shifts in monetary conditions. For historical perspective, over the last 21 years, there were 46 months in which a shift in the monetary environment occurred. Second, rebalancing occurs in June each year if there is no change in monetary conditions in the prior 6 months. Over the last 21 years, this has happened 6 times.

21. EIA’s IFED index methodology is unique from anything else in the market. Can anyone replicate the methodology or is it protected through a patent filing?

EIA has filed for patent protection for the IFED index methodology as well as copyright protection for the specific algorithms used to create the indexes.  EIA has also filed for trademark and tradename protection for the use of the terms IFED, Invest with the Fed and IFED indexes.

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