Defensive Asset Allocation (DAA)
Wouter Keller and JW Keuning's Defensive Asset Allocation watches two canaries, emerging-market stocks and US bonds. With both healthy it holds the six strongest of twelve asset classes; with one weak it holds the top three at a sixth each and puts half in the best short-term bond fund; with both weak it holds only that bond fund.
Designed by Wouter Keller and JW Keuning, 2018. Implemented and tracked by Tactfolio.
| Apr 2008 – Sep 2026 | Strategy | SPY |
|---|---|---|
| Annual return (CAGR) | 8.5% | 11.9% |
| Worst drawdown | -19.3% | -51.5% |
| Sharpe ratio | 0.82 | 0.67 |
| Volatility | 10.7% | 19.7% |
| Annual return since publication (Aug 2018) | 8.5% | 14.9% |
| Mar 2006 – Sep 2026 | Strategy | SPY |
|---|---|---|
| Annual return (CAGR) | 8.8% | 11.1% |
| Worst drawdown | -19.3% | -55.2% |
| Sharpe ratio | 0.83 | 0.65 |
| Volatility | 10.9% | 19.3% |
| Annual return since publication (Aug 2018) | 8.5% | 14.9% |
Defensive Asset Allocation (DAA) is a monthly strategy published in 2018 by Wouter Keller and JW Keuning. It follows Vigilant Asset Allocation, but with one change that makes it far less jumpy: it decides when to be defensive by watching two "canary" assets, not the assets it actually holds.
The idea#
Vigilant Asset Allocation went defensive whenever any of its holdings weakened. That protected capital, but it also sat in cash too often. DAA separates the two jobs. A small canary universe (emerging-market stocks and US bonds) acts as the warning system, and a broad universe of twelve asset classes supplies the holdings.
Keller and Keuning found that emerging markets and bonds tend to weaken early in broad sell-offs. Watching only those two lets the strategy stay invested in its best-performing assets most of the time, while still stepping aside when the canaries start to fall.
How it works#
At the close of the last trading day of each month, every fund's momentum is measured with Keller's 13612W score. This is a weighted average of the 1-, 3-, 6-, and 12-month returns with weights of 12, 4, 2, and 1.
- Check the two canaries: VWO (emerging-market stocks) and BND (US aggregate bonds).
- Both positive: hold the six strongest of twelve risky funds, one sixth each. The twelve are SPY, IWM, QQQ, VGK, EWJ, VWO, VNQ, GSG, GLD, TLT, HYG, and LQD.
- One of them zero or negative: hold the three strongest risky funds at one sixth each, and put the other half in the strongest "cash" fund: SHY, IEF, or LQD.
- Both zero or negative: hold only the strongest cash fund.
What the backtest shows#
Over the ETF era DAA-G12 beat both the S&P 500 and a 60/40 portfolio on risk-adjusted return, with a worst drawdown well under half the S&P 500's. It was roughly flat in 2008, when the S&P 500 lost about a third.
DAA has also held up after publication better than most classic tactical strategies. Since mid-2018 its risk-adjusted return has been about in line with a 60/40 mix, though its raw return has trailed the S&P 500. Holding six assets rather than one keeps its results much smoother than Vigilant Asset Allocation's.
When it struggles#
- Strong single-market bull runs. Spreading across twelve asset classes means owning gold, bonds, and commodities while US stocks lead.
- False alarms. The canaries sometimes weaken without a broad sell-off following, and the half-defensive state then lags.
- Rising rates. When bonds fall, the BND canary can trigger defensive moves into funds that are themselves falling.
Using it on Tactfolio#
The live strategy above runs these rules on daily data. Open it to inspect the three states, or copy it and experiment. You could try a different canary pair, or hold fewer assets for a more concentrated version.
Year by year
| Year | Strategy | SPY |
|---|---|---|
| 2026* | 8.8% | 14.0% |
| 2025 | 17.7% | 17.7% |
| 2024 | 4.7% | 24.9% |
| 2023 | 10.5% | 26.2% |
| 2022 | -10.3% | -18.2% |
| 2021 | 3.9% | 28.7% |
| 2020 | 25.9% | 18.3% |
| 2019 | 12.0% | 31.2% |
| 2018 | 4.5% | -4.6% |
| 2017 | 15.0% | 21.7% |
| 2016 | 7.4% | 12.0% |
| 2015 | -4.4% | 1.2% |
| 2014 | 6.8% | 13.5% |
| 2013 | 13.4% | 32.3% |
| 2012 | 10.3% | 16.0% |
| 2011 | 2.1% | 1.9% |
| 2010 | 10.1% | 15.1% |
| 2009 | 25.6% | 26.4% |
| 2008* | -0.6% | -32.4% |
| Year | Strategy | SPY |
|---|---|---|
| 2026* | 8.8% | 14.0% |
| 2025 | 17.7% | 17.7% |
| 2024 | 4.7% | 24.9% |
| 2023 | 10.5% | 26.2% |
| 2022 | -10.3% | -18.2% |
| 2021 | 3.9% | 28.7% |
| 2020 | 25.9% | 18.3% |
| 2019 | 12.0% | 31.2% |
| 2018 | 4.5% | -4.6% |
| 2017 | 15.0% | 21.7% |
| 2016 | 7.4% | 12.0% |
| 2015 | -4.4% | 1.2% |
| 2014 | 6.8% | 13.5% |
| 2013 | 13.4% | 32.3% |
| 2012 | 10.3% | 16.0% |
| 2011 | 2.1% | 1.9% |
| 2010 | 10.1% | 15.1% |
| 2009 | 25.6% | 26.4% |
| 2008 | -0.8% | -36.8% |
| 2007 | 14.8% | 5.1% |
| 2006* | 9.5% | 12.2% |
* Partial year.
The rules as implemented
This is the exact tree Tactfolio runs, rebalanced monthly with signals and trades at the close. Open it to inspect or copy it.
- StrategyKeller DAA-G12
- WeightEqual
- IfAll of 2 conditions
- 1/3/6/12-month weighted momentum of VWO is at most 0
- 1/3/6/12-month weighted momentum of BND is at most 0
Then- WeightEqual
- RankTop 1 · 1/3/6/12-month weighted momentum
- TickerSHY
- TickerIEF
- TickerLQD
- RankTop 1 · 1/3/6/12-month weighted momentum
Otherwise- WeightEqual
- IfAny of 2 conditions
- 1/3/6/12-month weighted momentum of VWO is at most 0
- 1/3/6/12-month weighted momentum of BND is at most 0
Then- WeightSpecified
- RankTop 3 · 1/3/6/12-month weighted momentum50%
- TickerSPY
- TickerIWM
- TickerQQQ
- TickerVGK
- TickerEWJ
- TickerVWO
- TickerVNQ
- TickerGSG
- TickerGLD
- TickerTLT
- TickerHYG
- TickerLQD
- RankTop 1 · 1/3/6/12-month weighted momentum50%
- TickerSHY
- TickerIEF
- TickerLQD
- RankTop 3 · 1/3/6/12-month weighted momentum50%
Otherwise- WeightEqual
- RankTop 6 · 1/3/6/12-month weighted momentum
- TickerSPY
- TickerIWM
- TickerQQQ
- TickerVGK
- TickerEWJ
- TickerVWO
- TickerVNQ
- TickerGSG
- TickerGLD
- TickerTLT
- TickerHYG
- TickerLQD
- RankTop 6 · 1/3/6/12-month weighted momentum
- IfAny of 2 conditions
- IfAll of 2 conditions
- WeightEqual
Sources and caveats
- Wouter Keller and JW Keuning, Breadth Momentum and the Canary Universe: Defensive Asset Allocation (2018)
- JW Keuning, Announcing Defensive Asset Allocation (TrendXplorer)
- Uses the source's universes, including the VWO and BND canaries, with 13612W momentum, top 6, and breadth 2.
- Signals and trades use the close of the last trading day of each month, as in the source.
Common questions#
What is Defensive Asset Allocation?#
It is a monthly momentum strategy by Wouter Keller and JW Keuning (2018). Two canary assets decide how defensive to be, and the portfolio holds the strongest of twelve global asset classes.
What are the DAA canary assets?#
VWO (emerging-market stocks) and BND (US aggregate bonds). If both have positive 13612W momentum the strategy is fully invested; if one is negative it is half defensive; if both are negative it is fully defensive.
How is DAA different from VAA?#
VAA turns defensive when any asset it could hold weakens. DAA looks only at its two canaries, so it spends much less time in cash and holds six assets instead of one.
How often does DAA rebalance?#
Monthly, at the close of the last trading day.