Momentum Investing

A subscriber asked about an update of “Simplest Asset Class ETF Momentum Strategy?”, which each month holds SPDR S&P 500 ETF Trust (SPY) or iShares 20+ Year Treasury Bond (TLT) depending on which has the higher total return over the last three months, including a direct comparison to a portfolio that each month allocates 50% to Simple Asset Class ETF Value Strategy (SACEVS) Best Value and 50% to Simple Asset Class ETF Momentum Strategy (SACEMS) equal-weighted (EW) Top 2. We begin the test at the end of June 2006, limited by SACEMS inputs. We ignore monthly switching frictions for both strategies. Using monthly dividend-adjusted prices for SPY and TLT starting March 2006 and monthly gross returns for 50-50 SACEVS Best Value and SACEMS EW Top 2 starting July 2006, all through November 2024, we find that: Keep Reading

A subscriber wondered whether choosing the fourth place asset class exchange-traded fund (ETF) rather than the third place class ETF for monthly reformation of the Simple Asset Class ETF Momentum Strategy (SACEMS) would matter if the difference in respective past returns over the ranking interval is less than 0.5%. To investigate, we take a broad, systematic approach and test the following two scenarios:

1. Impose a buffer of -0.5% when reforming the SACEMS portfolio. Specifically, each month subtract 0.5% from the past returns of the first, second and third places of last month before reranking. This test captures the subscriber question as a subset, but tends to increase trading due to small ranking return differences.
2. Impose a buffer of 0.5% when reforming the SACEMS portfolio. Specifically, each month add 0.5% to the past returns of ETFs for the first, second and third places of last month before reranking. This test tends to suppress trading due to small ranking return differences. 

For the second scenario, we also look at effects of buffers larger than 0.5% for the Equal-Weighted (EW) Top 2 SACEMS portfolio. Using monthly SACEMS outputs during June 2006 through November 2024, we find that: Keep Reading

We have updated monthly allocations and performance data for the Simple Asset Class ETF Momentum Strategy (SACEMS) and the Simple Asset Class ETF Value Strategy (SACEVS). We have also updated performance data for the Combined Value-Momentum Strategy.

SACEMS rankings this month are so close that post-close ETF price adjustments could affect them. If so, we will revise the winners to reflect the adjustments for consistency with backtest data.

We have updated the Trading Calendar to incorporate data for November 2024.

The home page, Simple Asset Class ETF Momentum Strategy (SACEMS) and Simple Asset Class ETF Value Strategy (SACEVS) now show preliminary positions for December 2024. SACEMS rankings are close and could change by the early close. SACEVS allocations are unlikely to change by the early close.

Does degree of co-movement among commodity exchange-traded funds (ETF) predict whether momentum or reversal is imminent? In their September 2024 paper entitled “How to Improve Commodity Momentum Using Intra-Market Correlation”, Radovan Vojtko and Margaréta Pauchlyová investigate whether the relationship between short-term and long-term average pairwise return correlations indicates when to pursue momentum and when to pursue reversal among commodity ETFs. Based on prior research, they consider four ETFs: DBA (agriculture), DBB (base metals), DBE (energy) and DBP (precious metals). Their strategies consists of each month:

1. Ranking the four ETFs by 12-month past return.
2. Calculating average pairwise 20-day and 250-day daily return correlations for the four ETFs.
3. If the average short-term correlation is higher (lower) than the average long-term correlation, executing an equal-weighted momentum (reversal) strategy by buying (selling) the two top-ranked ETFs and selling (buying) the two bottom-ranked ETFs.

Using daily adjusted closes for the selected ETFs from the end of 2007 through early 2024, they find that: Keep Reading

Is momentum a rational firm earnings growth proxy rather than a manifestation of investor underreaction/overreaction to news? In their August 2024 paper entitled “A Unified Framework for Value and Momentum”, Jacob Boudoukh, Tobias Moskowitz, Matthew Richardson and Lei Xie present an asset pricing model that treats value and momentum as complementary inputs to a present value of earnings estimate. They view momentum, return from 12 months ago to one month ago, as a noisy proxy for earnings growth. They test this view by relating momentum retrospectively to actual earnings growth. They further construct an asset pricing model based on a single growth-adjusted value factor and compare its effectiveness to that of the widely used 4-factor (market, size, book-to-market, momentum) model. They calculate growth-adjusted value factor returns via monthly, 5-year smoothed bivariate value-growth regressions, with three alternatives for earnings growth adjustment: (1) momentum as a proxy for growth; (2) a combination of momentum and analyst earnings forecasts as a proxy for growth; and, (3) retrospective actual earnings. They focus on individual U.S. stocks, but also look at U.S. industries, stocks across 23 developed equity markets and Japanese stocks. Using monthly book-to-market ratios, stock returns, next-year earnings growth forecasts and actual annual earnings as available for Russell 3000 stocks since the end of March 1984, for stocks in 23 developed country markets since the end of January 1989 and for stocks in the MSCI Japan Index since the end of August 1988, all through December 2019, they find that:

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Are equity multifactor strategies, as implemented by exchange-traded funds (ETF), attractive? To investigate, we consider eight multifactor ETFs, all currently available:

• iShares Edge MSCI Multifactor USA (LRGF) – holds large and mid-cap U.S. stocks with focus on quality, value, size and momentum, while maintaining a level of risk similar to that of the market. The benchmark is iShares Russell 1000 (IWB).
• iShares Edge MSCI Multifactor International (INTF) – holds global developed market ex U.S. large and mid-cap stocks based on quality, value, size and momentum, while maintaining a level of risk similar to that of the market. The benchmark is iShares MSCI ACWI ex US (ACWX).
• Goldman Sachs ActiveBeta U.S. Large Cap Equity (GSLC) – holds large U.S. stocks based on good value, strong momentum, high quality and low volatility. The benchmark is SPDR S&P 500 (SPY).
• John Hancock Multifactor Large Cap (JHML) – holds large U.S. stocks based on smaller capitalization, lower relative price and higher profitability, which academic research links to higher expected returns. The benchmark is SPY.
• John Hancock Multifactor Mid Cap (JHMM) – holds mid-cap U.S. stocks based on smaller capitalization, lower relative price and higher profitability, which academic research links to higher expected returns. The benchmark is SPDR S&P MidCap 400 (MDY).
• JPMorgan Diversified Return U.S. Equity (JPUS) – holds U.S. stocks based on value, quality and momentum via a risk-weighting process that lowers exposure to historically volatile sectors and stocks. The benchmark is SPY.
• Xtrackers Russell 1000 Comprehensive Factor (DEUS) – seeks to track, before fees and expenses, the Russell 1000 Comprehensive Factor Index, which seeks exposure to quality, value, momentum, low volatility and size factors. The benchmark is IWB.
• Vanguard U.S. Multifactor (VFMF) – uses a rules-based quantitative model to evaluate U.S. common stocks and construct a U.S. equity portfolio that seeks to achieve exposure to multiple factors across market capitalizations (large, mid and small). The benchmark is iShares Russell 3000 (IWV).

We focus on monthly return statistics, along with compound annual growth rates (CAGR) and maximum drawdowns (MaxDD). Using monthly returns for the seven equity multifactor ETFs and benchmarks as available through August 2024, we find that: Keep Reading

“SACEVS and SACEMS Strategy Momentum?” finds support for belief that a strategy exploiting the relative performance of Simple Asset Class ETF Value Strategy (SACEVS) Best Value and Simple Asset Class ETF Momentum Strategy (SACEMS) Equal-Weighted (EW) Top 2 boosts performance, with focus on a 60%-40% tilt toward the strategy with the stronger past returns. It also considers a full tilt (100%-0%) toward the stronger strategy for one lookback interval. Here, we examine sensitivity of the performance of the full tilt alternative (SACEVS-SACEMS Momentum) across lookback intervals ranging from one to 12 months. This alternative holds either SACEVS Best Value or SACEMS EW Top 2 according to which has the higher past return. We focus on gross compound annual growth rate (CAGR) and gross maximum drawdown (MaxDD) as essential performance metrics. As a benchmark, we use the monthly rebalanced SACEVS Best Value-SACEMS EW Top 2 50%-50% baseline (SACEVS-SACEMS 50-50 Baseline). Using monthly returns for SACEVS Best Value and SACEMS EW Top 2 during July 2006 through July 2024, we find that:

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Do alternative “Cash” (deemed risk-free) instruments materially affect performance of the “Simple Asset Class ETF Momentum Strategy” (SACEMS)? Changing the proxy for Cash can affect how often the model selects Cash, as well as the return on Cash when selected. To investigate, we test separately each of the following yield and exchange-traded funds (ETF) as the risk-free asset:

• 3-month Treasury bills (Cash), a proxy for the money market as in base SACEMS
• SPDR Bloomberg Barclays 1-3 Month T-Bill (BIL)
• iShares 1-3 Year Treasury Bond (SHY)
• iShares 7-10 Year Treasury Bond (IEF)
• Vanguard Short-Term Inflation-Protected Securities Index Fund (VTIP)
• iShares TIPS Bond (TIP)

We focus on compound annual growth rate (CAGR) and maximum drawdown (MaxDD) as key performance metrics and consider Top 1, equally weighted (EW) EW Top 2 and EW Top 3 SACEMS portfolios. Using end-of-month total (dividend-adjusted) returns for the specified assets during February 2006 (except May 2007 for BIL and October 2012 for VTIP) through July 2024, we find that:

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Are the “Simple Asset Class ETF Value Strategy” (SACEVS) and the “Simple Asset Class ETF Momentum Strategy” (SACEMS) mutually diversifying. To check, based on feedback from subscribers about combinations of interest, we look at three equal-weighted (50-50) combinations of the two strategies, rebalanced monthly:

1. 50-50 Best Value – EW Top 2: SACEVS Best Value paired with SACEMS Equally Weighted (EW) Top 2 (aggressive value and somewhat aggressive momentum).
2. 50-50 Best Value – EW Top 3: SACEVS Best Value paired with SACEMS EW Top 3 (aggressive value and diversified momentum).
3. 50-50 Weighted – EW Top 3: SACEVS Weighted paired with SACEMS EW Top 3 (diversified value and diversified momentum).

We consider as a benchmark a simple technical strategy (SPY:SMA10) that holds SPDR S&P 500 ETF Trust (SPY) when the S&P 500 Index is above its 10-month simple moving average and 3-month U.S. Treasury bills (Cash, or T-bills) when below. We also test sensitivity of results to deviating from equal SACEVS-SACEMS weights. Using monthly gross returns for SACEVS, SACEMS, SPY and T-bills during July 2006 through July 2024, we find that: Keep Reading