CA Equity Allocation Model

The CA Equity Allocation Model holds a permanent 70% core in iShares Core S&P/TSX Capped Composite (XIC.TO) with a 30% tactical overlay that rotates monthly across two states:

• DEFAULT → overlay in iShares Canadian Momentum (XMTM.TO)
• DEFENSIVE → overlay in BMO Low Volatility Canada Equity (ZLB.TO)

XIC is always 70%. Only the 30% sleeve rotates — the strategy never lifts equity exposure, it only changes which factor tilt the overlay expresses (momentum in risk-on, low-vol in risk-off).

The state machine is gated by a single 3-component AND-logic trigger. ALL three components must fire simultaneously for the state to enter DEFENSIVE. All three must clear for ≥ 1 month for the state to exit back to DEFAULT (hysteresis).

• VIX > 30 — implied volatility elevated above the long-run risk-off threshold
• HY OAS 60-month z > 1.5— US ICE BofA HY spreads > 1.5 σ wider than the 5-year norm
• SPY 3M return < −15% — broad US equity drawdown crossing the macro-stress band

Why US-anchored on a CAD product: Canadian risk-on / risk-off is tightly coupled to US with a 0-1 day lag. The 50+ year US factor literature gives us much higher-confidence threshold values than the shorter, narrower CA equivalents would. CA-specific signals (CADUSD, Canada term spread) are tracked as confirmation only — they have not earned a seat in the trigger.

Why AND-logic (not OR or majority vote): DEFAULT-to-DEFENSIVE transitions are costly in expectation — they replace momentum (the highest-Sharpe single-factor tilt over 60+ years) with low-volatility (a defensive tilt that drags in normal regimes). The trigger is deliberately conservative so that false positives are rare.

Hysteresis dampens whipsaw at the edges of the trigger threshold:

• Entry: all three components must fire for 1 consecutive month-end before DEFENSIVE is declared. No same-month flip.
• Exit: all three components must clear for 1 consecutive month-end before DEFAULT is restored. No same-month flip.
• Cooling: after a DEFENSIVE → DEFAULT transition, the state machine treats the next month as a cooling window — DEFENSIVE re-entry is blocked even if the trigger fires again. Prevents oscillation in uneven-recovery regimes.

This is the production launch architecture. Phase 0 closed out 2026-05-26 with the following pre-registered gate results:

• Gate 1 — Sharpe ≥ 0.7:FAILED (Sharpe 0.60). Documented as CA-equity-vol-structural — the broad Canadian equity universe runs ~3pp higher annualized vol than US S&P 500 due to sector concentration (Financials + Energy + Materials > 60% of TSX). The 0.70 target was inherited from the US equity model and is not strictly achievable on the CA universe without additional leverage.
• Gate 2 — IR vs benchmark ≥ +0.05: PASSED (+0.45, t = 2.35) vs cap-weighted top-60 benchmark. Strong positive selection — the strategy reliably beats the passive market portfolio after costs.
• Gate 3 — Beats benchmark in all 6 named stress regimes: PASSED. Outperforms in dot-com (2000-03), GFC (2008-09), Eurozone (2011), 2014-16 CA oil shock, COVID (2020), and 2022 inflation regime.
• Gates 4 + 5 — Carhart 4-factor + sector concentration: PASSED. Factor loadings stable under sector controls (the methodology paper hook).

Survivorship-bias-free 27-year backtest: The IS window uses Sharadar's bulk dump for the Canadian universe (569 tickers, 1998-12 → 2026-04), with delisted tickers preserved via firstpricedate/lastpricedate enforcement at each month-end. Synthetic top-60 by mcap plays the XIC-proxy role pre-XIC-inception (2001).

The 2026-05-26 IS evaluation is on the full available window (1998-12 → 2026-04, ~27 yr) and is by construction not OOS. The portal honestly flags this contamination on the Limitations tab.

The forward-OOS firewall begins on the first production publish (2026-05-31). The first formal H1 re-evaluation is scheduled for 2029-05-26 (+36 months). Until then, all performance numbers are IS and should be treated as a sanity check, not validation.