Testing ETF Momentum/Reversal Strategies

Do exchange-traded funds (ETF) exhibit statistically reliable short-term reversal and intermediate-term momentum? In their October 2018 paper entitled “Momentum Strategies for the ETF-Based Portfolios”, Daniel Nadler and Anatoly Schmidt look for reversal and momentum in next-month performance of past winners and past losers for the following 13 universes:

• U.S. Equity ETFs: 28 US equity ETFs with returns available at the beginning of 2006.
• Multi-Asset Class ETFs: U.S. Equity ETFs plus one gold ETF, five international equity ETFs and five bond ETFs, also with returns available at the beginning of 2006.
• 11 U.S. Equity ETF Proxies: formed separately from the stock holdings as of January 2018 of each of SPDR S&P 500 (SPY), PowerShares NASDAQ 100 (QQQ) or one of the nine Select Sector SPDRs.

Every day for each universe, they reform overlapping winner (loser) portfolios consisting of the equally weighted tenth (decile) of assets with the highest (lowest) total returns over the past 21, 63, 126 or 252 trading days and hold for 21 trading days. They consider two test periods: 2007 through 2017, and 2011 through 2007. They use equal-weighted portfolios of all assets in each universe as the benchmark for that universe. They conclude that one portfolio beats another when the difference between average 21-day future returns is statistically significant with p-value less than 0.10. Using daily returns for the specified assets during 2006 through 2017, they find that: (more…)