Vigilant Asset Allocation (VAA): 10% CAGR — Does It Beat SPY?

Welcome back to Avalon QuantBrief, where we dissect high-performance quantitative strategies to help you navigate volatile markets. Today, we are exploring Vigilant Asset Allocation (VAA), a famous momentum framework published by Keller and van Putten in 2017, and how we can adapt it to tame high-beta leveraged ETFs. By implementing advanced risk controls, we can capture the explosive upside of assets like TQQQ and SOXL while keeping drawdowns strictly under control.

Backtest Summary (2017–present)

📈 CAGR: 10.2%
📉 Max Drawdown: -18.6%
⚡ Sharpe Ratio: 0.78
💰 Total Return: 163.8%
🎯 Universe: TQQQ, UPRO, SOXL, TNA, TLT, GLD, SHY

Understanding the Mechanics of Vigilant Asset Allocation

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The original VAA strategy is an elegant framework that splits its investment universe into offensive assets like equities and defensive assets like bonds or gold. By calculating a weighted momentum score across multiple lookback periods, VAA determines whether the market is in a risk-on or risk-off regime. If even a single offensive asset shows negative momentum, the strategy rapidly rotates into safe havens to avoid catastrophic bear markets.

Upgrading VAA for Leveraged ETFs

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To make the strategy highly responsive to leveraged ETFs like TQQQ and UPRO, we introduced three key upgrades to the classic VAA model. First, we apply a Multi-timeframe Trend Velocity weighting to prioritize short-term price action, alongside a two-factor market state filter requiring SPY to be above its 200-day SMA and the VIX to be below 25. Finally, a daily emergency stop-loss exits the portfolio to cash immediately if SPY drops more than 3% below its trendline mid-month.

The Backtest Results: High Returns, Controlled Risk

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Backtesting this adapted variation from 2017 to the present across our high-beta universe yielded highly impressive results. The strategy achieved a total return of 163.8%, translating to a compound annual growth rate (CAGR) of 10.2% and a strong Sharpe ratio of 0.78. Most importantly, the maximum drawdown was capped at just minus 18.6%, representing a massive risk-management improvement over standard buy-and-hold strategies.

Analyzing the Equity Curve Through Market Crises

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During the 2020 pandemic crash and the 2022 bear market, where traditional VAA suffered from lag, our adapted version triggered the daily emergency stop-loss to shift assets into SHY and cash almost instantly. This rapid response kept the equity curve remarkably flat during periods of extreme market panic. By combining the VIX threshold with the SPY trendline, we successfully avoided the high-volatility whipsaws that typically destroy leveraged portfolios.

The Final Verdict: Institutional-Grade Risk Controls

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For traders seeking exposure to high-performing leveraged ETFs without the heart-stopping drawdowns, this adapted Vigilant Leveraged Trend Rotation strategy offers an exceptional framework. It perfectly balances aggressive growth with institutional-grade risk controls to keep your capital safe. To see how we deploy this and other quantitative models in our live portfolio, make sure to subscribe and join our community today.

⚠️ Not financial advice. This is for educational purposes only. Always do your own research before investing.

📄 Original paper: Vigilant Asset Allocation (VAA): An Improved Version of Momentum Investing

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