Alternative Asset Class ETF Momentum Allocations

Posted in Momentum Investing, Strategic Allocation

 

A subscriber suggested an alternative to the “Simple Asset Class ETF Momentum Strategy” that weights asset class ETFs according to five-month past return ranking (such as 35-25-20-10-4-3-2-1) rather than allocating all funds to the winner. Do the diversification benefits of this alternative outweigh the loss of momentum purity? To investigate, we return to the following eight asset class exchange-traded funds (ETF), plus cash:

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)

As one benchmark, we allocate all funds at the end of each month to the asset class ETF or cash with the highest total return over the past five months (5-1). As another benchmark, we maintain an equal-weighted (EW), monthly rebalanced portfolio of all nine asset classes. As alternatives, we test two momentum rank-weighted (RW), linearly-scaled combinations of all nine classes, one steep across ranks and one shallow. We also test EW combinations of the Top 5, Top 4, Top 3 and Top 2 momentum ranks. Using monthly adjusted closing prices for the asset class proxies and the yield for Cash over the period February 2006 (the earliest all ETFs are available) through May 2014 (100 months), we find that: (more…)

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