Rebalancing Frequency Dominates Risk Proxy Choice: A Comparison of Mean–Variance, MAD, and Quantile-Constrained Portfolios of U.S. Sector ETFsDisclosure: not investment advice
A comparison of variance, MAD, IQR and a wider central-quantile risk proxy in constrained portfolio construction across nine U.S. sector ETFs and 27 years, finding that rebalancing cadence matters more than the risk measure.
Contents
Portfolio construction offers a choice of risk proxy — variance, mean absolute deviation (MAD), interquartile range (IQR), or a wider central-quantile measure (P95). The practical question is whether that choice actually changes outcomes, or whether it gets swamped by the other decisions involved in running a portfolio.
The setup
Nine U.S. sector ETFs over 27 years. Every strategy shares the same constraints — long-only, fully invested, a maximum allocation cap and an explicit cash sleeve — and each is evaluated across a range of annualised risk budgets and rebalancing schedules under a strict no-look-ahead timeline.
Holding the constraints fixed is what makes the comparison mean anything. Risk proxies are usually compared in isolation, where implementation differences are free to masquerade as differences between the measures themselves.
The finding
Rebalancing frequency dominates the choice of risk proxy. Once the constraints are imposed, performance differences across rebalancing schedules are typically larger than differences across variance, MAD, IQR or P95.
The robust proxies are feasible to implement, and they are not a free lunch: at longer rebalance intervals in particular, they converge toward similar allocations and similar realised outcomes as variance-based optimisation.
Why it matters
The implication is a reordering of priorities. Operational decisions — how often the portfolio is actually traded — may deserve more attention than the selection of the risk metric, which is where much of the methodological argument has gone.
Accepted at Risks (MDPI) and in pre-publication review. The DOI and the published version will be linked here once they issue.
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