Protective Asset Allocation (PAA)

Wouter Keller and JW Keuning's Protective Asset Allocation. It counts how many of twelve asset classes trade above their 12-month average: with all twelve up it holds the six strongest; each one that turns down moves another sixth into the stronger of short and intermediate Treasuries, and with six or more down it holds only that bond fund.

Designed by Wouter Keller and JW Keuning, 2016. Implemented and tracked by Tactfolio.

Open the live strategyCopy it to your account
1×2×3×5×20082012201620202024
Growth of $1, log scale. Strategy SPY. Hypothetical results on daily ETF prices with trading costs, through Sep 2026.
Apr 2008 – Sep 2026StrategySPY
Annual return (CAGR)6.9%11.9%
Worst drawdown-14.2%-51.5%
Sharpe ratio0.810.67
Volatility8.8%19.7%
Annual return since publication (May 2016)8.2%15.3%

Protective Asset Allocation (PAA) is a monthly strategy published in 2016 by Wouter Keller and JW Keuning. Keller describes it as "a simple momentum-based alternative for term deposits": a way to earn more than cash while keeping losses small. Instead of switching between all-in and all-out, it scales out of risk gradually as fewer assets hold their trend.

The idea#

PAA reads the whole market's breadth. It counts how many of twelve asset classes are trading above their long-term average. When nearly all of them are, the environment is healthy and the strategy invests in the strongest. As more of them break down, it moves a growing share into Treasuries.

This graded response is the point. The portfolio reduces risk in steps, so it rarely goes all-in at a peak or sells everything at a bottom.

How it works#

At the close of the last trading day of each month:

  1. Measure momentum for twelve funds: SPY, QQQ, IWM, VGK, EWJ, EEM, VNQ, GSG, GLD, HYG, LQD, and TLT. Momentum is "SMA12": today's price divided by the average of the last 13 month-end prices, minus one.
  2. Count the positive scores. Call that number n.
  3. Set the bond fraction to (12 − n) ÷ 6, capped at 100%. With all twelve positive it is zero. Each asset that turns negative adds one sixth. With six or more negative, the portfolio is entirely in bonds.
  4. Split the rest equally across the six strongest funds.
  5. Hold the bond fraction in whichever of SHY (1–3 year) and IEF (7–10 year Treasuries) has the stronger momentum.

This is the version the authors headline, with a protection factor of 2 and six holdings.

What the backtest shows#

PAA is the most conservative strategy in our classic library. Over the ETF era its annual return was the lowest of the group. But its worst drawdown was about a quarter of the S&P 500's, and its risk-adjusted return beat both the S&P 500 and a 60/40 portfolio. It gained in 2008 and lost only a few percent in 2022.

It has also done well since publication. From May 2016 its risk-adjusted return beat a 60/40 mix, with a worst loss of about a tenth, over one of the longest post-publication records in our library. Like any defensive strategy it gave up a great deal of return in the long bull market that followed.

When it struggles#

  • Sudden crashes. It scales out gradually, so a crash that arrives within a single month hits it before the breadth signal moves.
  • Bull markets. Holding Treasuries whenever breadth dips keeps it well behind stocks in strong years.

Using it on Tactfolio#

The live strategy above implements the full bond-fraction schedule with nested conditions. Open it to see each step, or copy it and change the protection level. Raising the threshold makes it more defensive; lowering it makes it more aggressive.

Year by year

YearStrategySPY
2026*17.5%14.0%
202512.2%17.7%
202410.7%24.9%
20231.5%26.2%
2022-5.9%-18.2%
202111.4%28.7%
20209.7%18.3%
201911.4%31.2%
20184.8%-4.6%
201714.1%21.7%
20164.5%12.0%
2015-1.2%1.2%
20146.7%13.5%
20136.1%32.3%
20124.5%16.0%
20113.6%1.9%
201011.7%15.1%
20090.3%26.4%
2008*6.4%-32.4%

* 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 PAA
    • WeightEqual
      • IfAt least 12 of 12 conditions
        • 13-point relative SMA momentum of SPY is above 0
        • 13-point relative SMA momentum of QQQ is above 0
        • 13-point relative SMA momentum of IWM is above 0
        • 13-point relative SMA momentum of VGK is above 0
        • 13-point relative SMA momentum of EWJ is above 0
        • 13-point relative SMA momentum of EEM is above 0
        • 13-point relative SMA momentum of VNQ is above 0
        • 13-point relative SMA momentum of GSG is above 0
        • 13-point relative SMA momentum of GLD is above 0
        • 13-point relative SMA momentum of HYG is above 0
        • 13-point relative SMA momentum of LQD is above 0
        • 13-point relative SMA momentum of TLT is above 0
        Then
        • WeightEqual
          • RankTop 6 · 13-point relative SMA momentum
            • TickerSPY
            • TickerQQQ
            • TickerIWM
            • TickerVGK
            • TickerEWJ
            • TickerEEM
            • TickerVNQ
            • TickerGSG
            • TickerGLD
            • TickerHYG
            • TickerLQD
            • TickerTLT
        Otherwise
        • WeightEqual
          • IfAt least 11 of 12 conditions
            • 13-point relative SMA momentum of SPY is above 0
            • 13-point relative SMA momentum of QQQ is above 0
            • 13-point relative SMA momentum of IWM is above 0
            • 13-point relative SMA momentum of VGK is above 0
            • 13-point relative SMA momentum of EWJ is above 0
            • 13-point relative SMA momentum of EEM is above 0
            • 13-point relative SMA momentum of VNQ is above 0
            • 13-point relative SMA momentum of GSG is above 0
            • 13-point relative SMA momentum of GLD is above 0
            • 13-point relative SMA momentum of HYG is above 0
            • 13-point relative SMA momentum of LQD is above 0
            • 13-point relative SMA momentum of TLT is above 0
            Then
            • WeightSpecified
              • RankTop 6 · 13-point relative SMA momentum83.33%
                • TickerSPY
                • TickerQQQ
                • TickerIWM
                • TickerVGK
                • TickerEWJ
                • TickerEEM
                • TickerVNQ
                • TickerGSG
                • TickerGLD
                • TickerHYG
                • TickerLQD
                • TickerTLT
              • RankTop 1 · 13-point relative SMA momentum16.67%
                • TickerSHY
                • TickerIEF
            Otherwise
            • WeightEqual
              • IfAt least 10 of 12 conditions
                • 13-point relative SMA momentum of SPY is above 0
                • 13-point relative SMA momentum of QQQ is above 0
                • 13-point relative SMA momentum of IWM is above 0
                • 13-point relative SMA momentum of VGK is above 0
                • 13-point relative SMA momentum of EWJ is above 0
                • 13-point relative SMA momentum of EEM is above 0
                • 13-point relative SMA momentum of VNQ is above 0
                • 13-point relative SMA momentum of GSG is above 0
                • 13-point relative SMA momentum of GLD is above 0
                • 13-point relative SMA momentum of HYG is above 0
                • 13-point relative SMA momentum of LQD is above 0
                • 13-point relative SMA momentum of TLT is above 0
                Then
                • WeightSpecified
                  • RankTop 6 · 13-point relative SMA momentum66.67%
                    • TickerSPY
                    • TickerQQQ
                    • TickerIWM
                    • TickerVGK
                    • TickerEWJ
                    • TickerEEM
                    • TickerVNQ
                    • TickerGSG
                    • TickerGLD
                    • TickerHYG
                    • TickerLQD
                    • TickerTLT
                  • RankTop 1 · 13-point relative SMA momentum33.33%
                    • TickerSHY
                    • TickerIEF
                Otherwise
                • WeightEqual
                  • IfAt least 9 of 12 conditions
                    • 13-point relative SMA momentum of SPY is above 0
                    • 13-point relative SMA momentum of QQQ is above 0
                    • 13-point relative SMA momentum of IWM is above 0
                    • 13-point relative SMA momentum of VGK is above 0
                    • 13-point relative SMA momentum of EWJ is above 0
                    • 13-point relative SMA momentum of EEM is above 0
                    • 13-point relative SMA momentum of VNQ is above 0
                    • 13-point relative SMA momentum of GSG is above 0
                    • 13-point relative SMA momentum of GLD is above 0
                    • 13-point relative SMA momentum of HYG is above 0
                    • 13-point relative SMA momentum of LQD is above 0
                    • 13-point relative SMA momentum of TLT is above 0
                    Then
                    • WeightSpecified
                      • RankTop 6 · 13-point relative SMA momentum50%
                        • TickerSPY
                        • TickerQQQ
                        • TickerIWM
                        • TickerVGK
                        • TickerEWJ
                        • TickerEEM
                        • TickerVNQ
                        • TickerGSG
                        • TickerGLD
                        • TickerHYG
                        • TickerLQD
                        • TickerTLT
                      • RankTop 1 · 13-point relative SMA momentum50%
                        • TickerSHY
                        • TickerIEF
                    Otherwise
                    • WeightEqual
                      • IfAt least 8 of 12 conditions
                        • 13-point relative SMA momentum of SPY is above 0
                        • 13-point relative SMA momentum of QQQ is above 0
                        • 13-point relative SMA momentum of IWM is above 0
                        • 13-point relative SMA momentum of VGK is above 0
                        • 13-point relative SMA momentum of EWJ is above 0
                        • 13-point relative SMA momentum of EEM is above 0
                        • 13-point relative SMA momentum of VNQ is above 0
                        • 13-point relative SMA momentum of GSG is above 0
                        • 13-point relative SMA momentum of GLD is above 0
                        • 13-point relative SMA momentum of HYG is above 0
                        • 13-point relative SMA momentum of LQD is above 0
                        • 13-point relative SMA momentum of TLT is above 0
                        Then
                        • WeightSpecified
                          • RankTop 6 · 13-point relative SMA momentum33.33%
                            • TickerSPY
                            • TickerQQQ
                            • TickerIWM
                            • TickerVGK
                            • TickerEWJ
                            • TickerEEM
                            • TickerVNQ
                            • TickerGSG
                            • TickerGLD
                            • TickerHYG
                            • TickerLQD
                            • TickerTLT
                          • RankTop 1 · 13-point relative SMA momentum66.67%
                            • TickerSHY
                            • TickerIEF
                        Otherwise
                        • WeightEqual
                          • IfAt least 7 of 12 conditions
                            • 13-point relative SMA momentum of SPY is above 0
                            • 13-point relative SMA momentum of QQQ is above 0
                            • 13-point relative SMA momentum of IWM is above 0
                            • 13-point relative SMA momentum of VGK is above 0
                            • 13-point relative SMA momentum of EWJ is above 0
                            • 13-point relative SMA momentum of EEM is above 0
                            • 13-point relative SMA momentum of VNQ is above 0
                            • 13-point relative SMA momentum of GSG is above 0
                            • 13-point relative SMA momentum of GLD is above 0
                            • 13-point relative SMA momentum of HYG is above 0
                            • 13-point relative SMA momentum of LQD is above 0
                            • 13-point relative SMA momentum of TLT is above 0
                            Then
                            • WeightSpecified
                              • RankTop 6 · 13-point relative SMA momentum16.67%
                                • TickerSPY
                                • TickerQQQ
                                • TickerIWM
                                • TickerVGK
                                • TickerEWJ
                                • TickerEEM
                                • TickerVNQ
                                • TickerGSG
                                • TickerGLD
                                • TickerHYG
                                • TickerLQD
                                • TickerTLT
                              • RankTop 1 · 13-point relative SMA momentum83.33%
                                • TickerSHY
                                • TickerIEF
                            Otherwise
                            • WeightEqual
                              • RankTop 1 · 13-point relative SMA momentum
                                • TickerSHY
                                • TickerIEF

Sources and caveats

  • Uses SMA12 momentum with protection factor a = 2 and top 6, as in the source. VNQ stands in for IYR. The safe asset is the stronger of SHY and IEF by the same momentum, as in the co-author's description.
  • Signals and trades use the close of the last trading day of each month, as in the source.

Common questions#

What is Protective Asset Allocation?#

It is a monthly strategy by Wouter Keller and JW Keuning (2016). It invests in the six strongest of twelve asset classes and moves into Treasuries in proportion to how many of those assets have negative momentum.

How is the PAA bond fraction calculated?#

With protection factor 2 and twelve assets, the bond fraction is (12 − n) ÷ 6. Here n is the number of assets with positive SMA12 momentum, and the fraction is capped at 100%. Six or more negative assets means fully in bonds.

What is SMA12 momentum?#

It is the current price divided by the average of the last 13 month-end prices, minus one. A positive value means the price is above its one-year average.

Is PAA a replacement for cash?#

That was the authors' framing: a low-risk alternative to term deposits. It has had much higher returns than cash, but it is not risk-free. It can lose money, as it did in 2022.