ARMR Outperformed as the Equity Market Plunged Into Bear Market Territory
During March 2020, the -8.37% NAV return of Armor US Equity Index ETF (ARMR) outperformed the -12.51% return of the S&P 500 by 4.14%. Since inception, the fund had a return of -19.08% versus the -22.90% return of the S&P 500, or outperformance of 3.82% for the fund.
Sector Positioning During March
During March, the fund had a 100% allocation to technology stocks through its holding of the Vanguard Information Technology ETF (VGT). As much of the country entered “shelter in place” mode, technology stocks were perceived to be beneficiaries. Technology companies helped to facilitate remote workplace and education solutions as well as offered entertainment options.
Shift to Treasuries for April
The index which underlies the ARMR ETF uses a proprietary Market Performance Indicator (MPI) to estimate which sectors may offer strong, long-term performance potential with lower expected downside risk. The MPI uses a sector’s moving average price as a basis for this factor. When a sector is trading above (below) its moving average, it is included (excluded) in the index.
The sharp market correction that occurred during March created an unusual market environment in which every sector in the S&P 500 is now trading below its moving average. As a result, following its 3/31/20 rebalancing, ARMR has moved to a 100% allocation to Treasury securities.
Higher Returns, Lower Volatility
Given the swiftness and severity of the equity market decline and its resulting volatility, we believe that a move toward Treasuries is warranted. In the charts below, we looked at the performance of equities and Treasuries during the last two bear markets – the Dot Com Bust (3/24/00 – 10/9/02) and the Financial Crisis (10/9/07 – 3/9/09). The following items stand out and underscore our shift into Treasuries.
First, during those periods of market distress, Treasuries outperformed equities by a wide margin. During the Dot Com Bust, Treasuries provided a nearly 39% return, while equities declined over 47%. During the Financial Crisis, Treasures and equities returned 21% and -55%, respectively. Treasuries also exhibited less volatility than equities.
Additionally, there was a negative correlation between Treasuries and equities during these periods of market distress. During the Dot Com Bust, the correlation was -.3137 and during the Financial Crisis, it was -.4173. Thus, Treasuries may add risk-reducing diversification to your portfolio during periods of equity market distress and have the potential to shield your portfolio from large losses.
Beware of the Bear Market Rally
From its low on 3/23/20, the S&P 500 advanced over 18% by 3/26, raising the question of whether it is too late to allocate to Treasuries.
We cannot, with 100% accuracy predict, future market moves. However, historically, it has been common for equities to rally after sharp declines, only to decline once again to lower lows. Such occurrences are called “bear market rallies.”
For example, the chart below highlights five advances of 5% or more during the Dot Com Bust. These were subsequently followed by large declines in the equity market. During the subsequent declines, Treasuries outperformed equities by a large margin. We also saw the same pattern during the Financial Crisis.
We are not surprised to see the equity market rally following the sharp declined that began in February, nor are we surprised to the partial snapback. While we are not predicting that the bear market will persist, history does suggest that there may be further equity market pullbacks. Hence, the portfolio is defensively positioned.
Summary During March and since its inception, ARMR has outperformed the S&P 500. The fund is currently allocated to Treasuries, which, we believe, offers an attractive risk/return profile during the current economic and market volatility.
 Source: Yahoo Finance
 Correlation is a measure of the extent to which the prices of assets move together.