As elaborated in "What Works Best?", a strategic allocation involving perhaps five to ten equally weighted asset classes available via low-fee exchange-traded funds (ETF) or mutual funds, with periodic rebalancing, is a simple way for individual investors to harvest uncorrelated volatility over the long term. For investors seeking an active (tactical) edge, there is evidence supporting exploitation of intermediate-term momentum of these asset class proxies. Holding a few top-performing funds (rather than just the top fund) combines continuous diversification and momentum.
For the set of strategies described here, we allocate at the end of each month all funds to the top one (Top 1), the equally weighted top two (EW Top 2) or the equally weighted top three (EW Top 3) asset class ETFs from a set of nine, based on total return over the past five months.
Supporting research consists of:
- "Simple Asset Class ETF Momentum Strategy" investigates systematic rotation to a proxy for the best-performing asset class.
- "Simple Asset Class ETF Momentum Strategy Robustness/Sensitivity Tests" investigates the optimal historical ranking interval for asset class performance.
- "Asset Class Momentum Faster During Bear Markets?" focuses on performance of the strategy during equity bear markets.
- "Simple Asset Class ETF Momentum Strategy vs. Luck" examines how the strategy stacks up against pure luck.
- "Sticky Winner Asset Class ETF Momentum Strategy" tests whether limiting the trading of the strategy is effective.
- "Add Stop-loss to Asset Class Momentum Strategy?" tests whether adding an intra-month stop-loss rule to the strategy improves performance.
- "Alternative Asset Class ETF Momentum Allocations" test portfolios of multiple high-performing asset class proxies.
- "Weekly or Monthly Asset Class ETF Momentum?" examines whether weekly rotation signals outperform monthly signals.
- "Simple Asset Class Leveraged ETF Momentum Strategy" investigates whether using leveraged versions of asset class proxies improves strategy performance.
The following chart shows the gross cumulative values of $100,000 initial investments in Top 1, EW Top 2 and EW Top 3 portfolios since the end of August 2006 (when all ETFs considered are first available). The chart includes two benchmarks: buying and holding SPDR S&P 500 (SPY); and, an equally weighted, monthly rebalanced portfolio of all ETFs considered (EW All), indicative of simple diversification benefits.
Momentum Signal for April 2014 (Final)
Momentum ETF Winner
Second Place ETF
Third Place ETF