Meb Faber Tactical Asset Allocation Trading Strategy (ETF, Rules & Backtest)

Meb Faber’s Tactical Asset Allocation strategy is an active trend-following strategy that uses market timings and allocates assets across four asset classes: stocks, bonds, REITs, and commodities. These four asset classes are divided into five categories: U.S. stocks, foreign stocks, U.S. bonds, U.S. REITs, and World Commodities.

Using this strategy, you do not need to be in the market 100% of the time and expose yourself to additional risk, unlike passive/lazy strategies. You enter the market when Faber’s tactical asset allocation strategy gives an entry signal and exit when the strategy gives an exit signal.

Meb Faber’s Tactical Asset Allocation strategy can be implemented using five different index ETFs that are well-diversified and have good historical performance. There is no need to pick individual stocks, bonds, REITs, and other asset classes, or spending a lot of time and effort on this.

In this article, we will describe in detail the structure of the Faber Tactical Asset Allocation strategy and backtest it on historical price data.

Related reading: – Are you looking for a particular investment strategy? (We have plenty more)

Looking ahead, we can say that according to our backtests over the past 16 years, the Faber Tactical Asset Allocation strategy has the following performance stats:

• Compound annual return (CAR): 4.54%;
• Maximum drawdown (MDD): -13.24%;
• CAR/MDD ratio: 0.34;
• Standard deviation: 6.91%;
• Sharpe ratio (with a risk-free rate of 3%): 0.22.

Who Is Meb Faber

Meb Faber is the co-founder and chief investment officer of Cambria Investment Management. Faber manages ETFs, individual accounts, and private equity funds in Cambria.

Meb Faber is the author of numerous white papers and five books. He is a frequent lecturer and writer on investment strategies and has published in Barron’s, The New York Times, and The New Yorker.

Meb Faber graduated from the University of Virginia with a double degree in engineering and biology.

He has a pretty big following on Twitter and is active on social media.

What Is The Faber Tactical Asset Allocation Portfolio

Meb Faber recommends using the following five asset classes that have the same portfolio weights:

Asset Class	Portfolio Weight
U.S. Stocks	20%
Foreign Stocks	20%
U.S. Bonds	20%
U.S. REITs	20%
World Commodities	20%

Stocks In The Faber Tactical Asset Allocation Portfolio

Stocks are equity securities representing ownership (share/parts) in a corporation and giving the right to receive dividends if paid.

Historically, stocks have shown the highest returns, outperforming all other asset classes such as bonds, gold, and real estate.

The Faber Tactical Asset Allocation Portfolio includes the following types of stocks:

• U.S Stocks – U.S. large- and mid-cap growth and value stocks that virtually replicate the benchmark S&P 500 stock index;
• Foreign Stocks – non-U.S. large- and mid-cap stocks of countries outside the US that have a low correlation with U.S. stocks.

For stocks, we have picked these ETFs, which are well diversified, have high liquidity and long performance history:

Portfolio Sector	ETF Name	ETF Ticker
U.S Stocks	SPDR S&P 500 ETF Trust	SPY
Foreign (International) Stocks	iShares MSCI EAFE ETF	EFA

Bonds In The Faber Tactical Asset Allocation Portfolio

Bonds are fixed-income debt securities that are less profitable but safer than stocks. Bond owners are lenders – not owners (like shares). Bonds are safer because bond owners are paid before equity owners in case of bankruptcy.

Adding bonds to a portfolio reduces its overall return but makes the portfolio less volatile and more resilient to drawdowns during periods of crisis. Bonds have a low correlation with stocks, which improves portfolio diversification.

The Faber Tactical Asset Allocation Portfolio includes the following types of bonds:

• U.S Bonds – short-, medium- and long-term U.S. treasury, municipal, and investment-grade corporate bonds.

For bonds, we have picked these ETFs, which are well diversified, have high liquidity, and a long performance history:

Portfolio Sector	ETF Name	ETF Ticker
U.S Bonds	Vanguard Total Bond Market Index Fund	BND

REITs In The Faber Tactical Asset Allocation Portfolio

Real estate investment trusts (REITs) have the same rewards and risks as “traditional” stocks, but also have a historically low correlation with “traditional” stocks and various types of bonds.

Including REITs in a portfolio reduces the overall correlation of portfolio assets and makes the portfolio more diversified and sustainable.

For REITs, we have picked these ETFs, which are well diversified, have high liquidity and long performance history:

Asset Class	ETF Name	ETF Ticker
U.S REITs	iShares U.S. Real Estate ETF	IYR

Commodities In The Faber Tactical Asset Allocation Portfolio

Commodities are alternative types of investment and include metals, wood, oil, gas, grains, meat, and many other tangible commodities.

The peculiarity of commodities is that their market dynamics do not depend on each other and do not depend on the market dynamics of stocks, bonds, REITs, and other “traditional” assets.

Including commodities in a portfolio reduces the overall correlation of portfolio assets, making the portfolio more diversified and sustainable.

For commodities, we have picked these ETFs, which are well diversified, have high liquidity, and a long performance history:

Asset Category	ETF Name	ETF Ticker
World Commodities	Invesco DB Commodity Index Tracking Fund	DBC

Trading Rules Of The Faber Tactical Asset Allocation Trading Strategy

The trading rules of the Faber Asset Allocation Strategy are the following:

• A monthly time frame is used because it is fewer whipsaws than the daily time frame;
• A simple moving average (SMA) with 10 months are used;
• Buy trading rule: if at the end of the month the last closing price is above the SMA and we have no position, then we buy the asset class the same day at the closing price;
• Sell trading rule: if at the end of the month the last closing price is below the simple moving average and we are long, then we sell the asset class the same day at the closing price.

We allocate 20% to each position/asset. If there is no signal for the specific asset that month, we are in cash.

Backtesting Of The Faber Tactical Asset Allocation Trading Strategy

Let’s backtest the Faber Asset Allocation Strategy under the following conditions:

Trading Rules

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Portfolio equity curve:

Portfolio underwater curve (drawdowns, i.e., decline in value from a relative peak value to a relative trough):

Portfolio monthly and annual returns:

Year	Jan	Feb	Mar	Apr	May	Jun	Jul	Aug	Sep	Oct	Nov	Dec	Yr%
2007	N/A	0.0%	0.1%	0.2%	-0.0%	0.2%	0.4%	-0.4%	1.9%	1.9%	-0.1%	1.5%	5.7%
2008	0.7%	2.8%	-0.2%	1.6%	2.1%	0.8%	-3.1%	-1.9%	-2.9%	0.0%	0.0%	1.0%	0.6%
2009	-0.4%	-0.1%	0.2%	0.1%	0.1%	-0.2%	3.8%	3.6%	2.9%	-0.7%	4.6%	1.7%	16.5%
2010	-4.2%	1.9%	4.6%	2.1%	-6.8%	-2.0%	2.4%	-1.6%	1.2%	3.3%	-1.6%	5.5%	4.2%
2011	2.4%	3.3%	-0.2%	3.7%	-1.3%	-2.3%	0.6%	-3.6%	-3.2%	0.0%	-0.0%	0.2%	-0.6%
2012	0.1%	0.7%	1.2%	-0.1%	-6.2%	2.0%	1.0%	0.6%	0.7%	-1.2%	0.4%	1.1%	0.3%
2013	3.0%	-0.5%	1.7%	2.6%	-1.9%	-1.3%	2.2%	-2.5%	2.1%	1.7%	0.8%	1.1%	9.2%
2014	-1.9%	3.3%	0.1%	1.4%	1.5%	1.3%	-1.6%	2.1%	-2.5%	2.5%	1.5%	0.1%	8.1%
2015	0.9%	0.7%	-0.4%	-0.2%	0.2%	-1.4%	1.1%	-3.3%	0.0%	0.0%	-0.0%	-0.1%	-2.6%
2016	-1.8%	0.2%	0.2%	-0.2%	1.0%	2.1%	0.2%	-0.5%	0.8%	-2.0%	0.2%	1.3%	1.3%
2017	0.9%	1.1%	-0.3%	0.3%	1.2%	0.6%	1.4%	0.4%	0.7%	1.6%	1.5%	1.1%	11.0%
2018	2.1%	-2.5%	-0.5%	1.0%	0.6%	0.6%	0.6%	1.0%	0.0%	-3.2%	1.0%	-3.0%	-2.4%
2019	0.2%	0.1%	1.6%	1.4%	-2.0%	0.5%	0.4%	0.6%	1.3%	1.3%	0.7%	1.4%	7.8%
2020	-1.2%	-4.5%	-0.3%	0.6%	0.2%	0.5%	1.5%	2.2%	-2.0%	-2.0%	5.5%	3.3%	3.5%
2021	-0.0%	3.2%	2.2%	4.6%	1.9%	1.4%	1.7%	0.9%	-1.7%	4.7%	-3.5%	4.0%	20.7%
2022	-1.9%	0.2%	2.4%	-0.9%	1.4%	-2.3%	-0.6%	-0.4%	-2.0%	0.0%	0.0%	-1.5%	-5.6%
2023	1.8%	-2.8%	1.4%	1.1%	-1.0%	N/A	N/A	N/A	N/A	N/A	N/A	N/A	0.3%

Portfolio performance statistics compared to benchmark S&P 500 Total Return index:

Statistical Metric	Portfolio	S&P 500 TR
Annual Return %	4.54%	8.95%
Exposure %	63.75%	100.00%
Risk Adjusted Return %	7.13%	8.95%
Max. drawdown	-13.24%	-55.19%
CAR/MaxDD	0.34	0.16
Standard Deviation	6.91%	22.64%
Sharpe Ratio (3% risk-free)	0.22	0.26

Meb Faber Tactical Asset Allocation Trading Strategy – Conclusion

The active market timing strategy proved to be effective in the form of a much smaller drawdown, which is only -13.24%. This is very low and something most investors and traders can live with.

Passive portfolios that are in the market 100% of the time have much higher drawdowns – 40%, -50%, and higher.

This timing model can be used for various portfolios of other asset classes and ETFs. It is completely universal.

FAQ:

What are the asset classes involved in Meb Faber’s strategy?

Meb Faber’s Tactical Asset Allocation strategy is an active trend-following approach that involves market timing and asset allocation across four main classes: stocks, bonds, REITs, and commodities. The strategy allocates assets across five categories: U.S. stocks, foreign stocks, U.S. bonds, U.S. REITs, and world commodities.

How is the strategy implemented without picking individual stocks?

Meb Faber recommends using five well-diversified index ETFs with good historical performance to represent the chosen asset classes. The strategy includes U.S. Bonds, specifically short-, medium-, and long-term U.S. treasury, municipal, and investment-grade corporate bonds, represented by the Vanguard Total Bond Market Index Fund (BND).

Why include commodities in the portfolio?

Commodities, such as metals, wood, oil, gas, etc., are included to diversify the portfolio further. Their market dynamics are independent of traditional assets like stocks and bonds. And Also Real estate investment trusts (REITs) are included to provide the portfolio with the rewards and risks of traditional stocks while maintaining a historically low correlation with other asset classes.