Objective research to aid investing decisions

Value Investing Strategy (Strategy Overview)

Allocations for December 2020 (Preliminary)

Momentum Investing Strategy (Strategy Overview)

Allocations for December 2020 (Preliminary)
1st ETF 2nd ETF 3rd ETF

Combined Value-Momentum Strategy (SACEVS-SACEMS)

The Simple Asset Class ETF Value Strategy (SACEVS) seeks diversification across a small set of asset class exchange-traded funds (ETF) plus a monthly  tactical edge from timing term, credit and equity risk premiums. The two versions of SACEVS are: (1) most undervalued premium (Best Value) ; and, (2) weighting all undervalued premiums according to respective degree of undervaluation (Weighted).

The Simple Asset Class ETF Momentum Strategy (SACEMS) seeks diversification across asset classes via ETFs plus a monthly tactical edge from intermediate-term momentum. The three versions of SACEMS, all based on total ETF returns over recent months, are: (1) top one of nine ETFs (Top 1); (2) equally weighted top two (EW Top 2); and, (3) equally weighted top three (EW Top 3).

This combined strategy, seeking diversification across asset classes and two widely accepted anomalies, holds SACEVS Best Value and SACEMS EW Top 3 portfolio with equal weights (50-50) and end-of-month rebalancing coincident with SACEVS and SACEMS portfolio reformations.

Supporting research includes (items may at times be unavailable for a few days during updates):

Some additional relevant but less directly applicable research is in the last list of items in “What Works Best?“.

Some investors may want to follow the combined strategy. Others may want to modify the strategy with other than equal weights for SACEVS and SACEMS. Something to keep in mind is that adjusting weights based on sensitivity tests adds data snooping bias.

Cumulative Performance

The following chart tracks since the end of June 2006 (when all ETF series are first available) gross cumulative values of $100,000 initial investments in each of:

  • Combined SACEVS Best Value-SACEMS EW Top 3 (50-50).
  • SACEVS Best Value
  • SACEMS EW Top 3
  • SPDR S&P 500 (SPY).
  • A simple timing strategy that holds SPY (Cash) when the S&P 500 Index is above (below) its 10-month simple moving average (SPY:SMA10).

For perspective, we look at an array of performance metrics.

Performance Statistics

The next table summarizes annual/annualized returns for these strategies over different intervals commonly used to describe performance of funds. The annualized returns are compound annual growth rates. Maximum drawdown is the deepest peak-to-trough drawdown  for these strategies based on monthly measurements over the available sample period. For Sharpe ratio, to calculate excess annual return, we use average monthly yield on 3-month Treasury bills during a year as the risk-free rate for that year.

Based on available data, 50-50 SACEVS-SACEMS suppresses volatility compared to its component strategies, thereby boosting risk-adjusted performance.

Portfolio performance calculations are based on assumptions as summarized in Value Strategy and Momentum Strategy.

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