Why we focus on index ETF?

1. Inflation

We believe that world economic growth is unstoppable. 20 years later, the price of Coca-Cola will be higher than the present.

Deflation is harmful, but a suitable inflation rate can stimulate the economy. Central banks will remain inflation rate% positive when deflation is likely to happen (economic recession).

2. Diversification

A good portfolio construction can reduce overfitting and portfolio volatility so that the Sharpe ratio can be increased.

3. Higher market liquidity

Higher liquidity means lower volatility. It helps us to execute a better price.

Comments

Deflated Sharpe Ratio can reduce false discovery

Introduction With the recent advent of large financial datasets, machine learning, and high-performance computing, analysts can backtest millions of alternative investment strategies. Backtest optimizers search for combinations of parameters to maximize a strategy's simulated historical performance, leading to backtest overfitting. The performance inflation problem goes beyond backtesting. More generally, researchers and investment managers tend to report only positive results, a phenomenon is known as selection bias. Failure to control the number of tests involved in a given finding can lead to overly optimistic performance expectations. The Deflated Sharpe Ratio (DSR) corrects for two major sources of performance inflation: selection bias under multiple tests and non-normally distributed returns . By doing so, DSR helps separate legitimate empirical results from statistical deception. Backtesting is a good example. Backtesting is a historical simulation of how a particular inv...

Chicago Fed National Activity Index (CFNAI) can predict US economic uncertainty

What is the Chicago Fed National Activity Index (CFNAI)? Many people use unemployment rate% to measure the US economy. The correlation between unemployment rate% and GDP growth is always negative. However, many people now realize that it is wrong. Unemployment rate% has not been a good predictor since 2008. There was a precaution telling you that the unemployment rate% cannot accurately measure the economy in the past. Using CFNAI to measure the economy is better than using the unemployment rate%. The CFNAI is a weighted average of 85 existing monthly indicators of national economic activity. It is constructed to have an average value of zero and a standard deviation of one. Since economic activity tends toward trend growth rate over time, a positive index reading corresponds to growth above trend and a negative index reading corresponds to growth below trend. The 85 economic indicators that are included in the CFNAI are drawn from four broad categories of data: production and income; ...

Alternative Sector Classification Methods

Abstract This paper offers two alternative sector classification methods in order to classify companies more accurately. Introduction During the early 1900s, various departments of the US government initiated research and studies on the various industries and their different functions. Due to the lack of set standards, each department ended up using its own methodology. Consolidating information across multiple sources became a challenge. The Standard Industrial Classification (SIC) was hence proposed as a uniform classification system, aimed to represent major industries, sub-class and specific function/product, and was formally adopted in 1937. However, SIC was facing a challenge because of the change in the economic environment. After that, the Global Industry Classification System (GICS) was launched by Standard & Poor's (S&P) and Morgan Stanley (MSCI) in August 1999. The standard provides a comprehensive, globally consistent definition of economic sectors a...

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