Prometheus ETF Portfolio
Risk Control Rules
Welcome to Prometheus ETF Portfolio. The Prometheus ETF Portfolio aims to allow everyday investors to access an investment solution that combines active macro alpha, passive beta, and strict risk control, all in an easy-to-follow, low-turnover solution. We aim to achieve strong risk-adjusted returns relative to cash, with limited capital drawdowns in depth and duration. We do this in a highly accessible package, which rotates between three highly liquid ETFs, readily available to any investor with a brokerage account.
Our observations are as follows:
Prometheus ETF Portfolio side-stepped 80% of the drawdown in equity markets this week, turning an outlier event into a run-of-the-mill week for our program.
The distribution of macroeconomic regime probabilities has moved significantly, reflecting the recent shifts in cross-asset macro market pricing.
Our high-frequency tracking of macroeconomic fundamentals shows no meaningful change to overall economic activity, with growth expanding and inflation slowing. However, earnings expectations are now meaningfully rich versus their likely path.
Macro market trends have quickly pivoted to a deflationary stance.
Our systems take signals from markets and the economy to create a comprehensive, high-frequency macro view. With significant macroeconomic volatility being priced into markets, risk control rules. Our current allocations reflect this.
Let's begin sharing the data driving our current assessment of the macro regime and our ensuing risk management and positions.
Macro Regime Monitor
Our Macro Regime Monitors combine measures of macro trend, mean reversion, expected returns, and fundamental economic conditions to estimate tomorrow’s cross-asset, macro market environment. We recommend checking out the primer if you’re unfamiliar with these tools:
We share the latest readings below:
Our Macro Regime Monitors now show a dominance of disinflationary outcomes for macro markets. We visualize the expected return profiles one can expect during this distribution of predicted regimes below:
As we see above, the latest macro-market shifts have pushed our Regime Expected Returns for bonds higher and commodities significantly lower. A disinflationary portfolio mix of stocks and bonds, with equal risk contribution as opposed to dollar contribution, is likely to outperform.
Fundamental Macro Monitor
Our Macro Regime Probabilites account for changes in market prices and fundamentals. Our systems aggregate an extremely wide variety of fundamental economic data to create timely leading estimates for the direction of growth and inflation. We zoom into these fundamental gauges to offer a more granular view of the factors driving our strategies.
We begin with our Growth Gauge. Our Growth Gauge aggregates data across hundreds of economic growth variables to create a timely read of forward-looking macro pressures on GDP growth. We visualize this gauge below:
Over the last week, our Growth Gauge has slowed its uptrend. This is not a meaningful change to the outlook.
Next, we turn to our Inflation Gauge. Our Inflation Gauge, much like our Growth Gauge, aggregates data across hundreds of economic growth variables to create a timely read of forward-looking macro pressures on future inflation. We visualize this below:
Our Inflation Gauge continues to show downward pressures on CPI inflation, but the magnitude of this pressure remains limited.
Given the uncertainty around the economic environment, we also share the latest readings from our Earnings Expectations Monitor, which aggregates data from financial conditions and fundamental earnings drivers to estimate the likely path for S&P 500 earnings expectations:
Equity prices over time are determined by changes in earnings expectations. As such, carefully monitoring changes in the drivers of earnings expectations can give us insights into the price pressures at play in equity markets. Earnings expectations are driven by a combination of financial conditions and fundamental macro forces. Combining these measures, we create a timely gauge of earnings expectations. As we can see, our gauges have offered a timely and leading insight into cyclical changes in earnings expectations.
Thus, while our fundamental measures of growth expectations are rising, earnings expectations are now significantly rich to their likely forward path, keeping equity markets exposed to further risks.
Market Monitor
Our Macro Regime Probabilites account for changes in market prices and fundamentals. We now zoom in on some of the market measures we track. Particularly, we focus on measures of trend, as they help us contextualize the current backdrop and signal the need for risk management.
We begin with stocks:
Equity markets are now in a decisive downtrend.
We turn to bonds next.
Bond markets have rallied in response to the equity sell-off, bringing them into an uptrend. We turn to commodities.
Despite the recent breakdown of commodity prices, commodities remain in an uptrend. Overall, market trends are now consistent with a disinflationary downturn.
Portfolio Construction
Aggregating measures of macro trend, mean reversion, expected returns, and fundamental economic conditions, our systems are looking to position the Prometheus ETF Portfolio as follows: