Simple Asset Class ETF Momentum Strategy Robustness/Sensitivity Tests
Posted in Momentum Investing, Strategic Allocation
May 6, 2013
How sensitive is the performance of the “Simple Asset Class ETF Momentum Strategy” to selecting ranks other than winners and to choosing a momentum ranking interval other than five months? This strategy each month ranks the following eight asset class exchange-traded funds (ETF), plus cash, on past return and rotates to the strongest class:
PowerShares DB Commodity Index Tracking (DBC)
iShares MSCI Emerging Markets Index (EEM)
iShares MSCI EAFE Index (EFA)
SPDR Gold Shares (GLD)
iShares Russell 1000 Index (IWB)
iShares Russell 2000 Index (IWM)
SPDR Dow Jones REIT (RWR)
iShares Barclays 20+ Year Treasury Bond (TLT)
3-month Treasury bills (Cash)
Available data are so limited that sensitivity test results may mislead. With that reservation, we perform two robustness/sensitivity tests: (1) comparison of returns for all nine ranks of winner through loser based on a ranking interval of five months and a holding interval of one month (5-1); and, (2) comparison of winner returns for ranking intervals ranging from one to 12 months (1-1 through 12-1) and for a six-month lagged six-month ranking interval (12:7-1) per “Isolating the Decisive Momentum (Echo?)”, all with one-month holding intervals. Using monthly adjusted closing prices for the asset class proxies and the yield for Cash over the period July 2002 (or inception if not available then) through April 2013 (130 months), we find that: (more…)