Objective research to aid investing decisions

Value Investing Strategy (Strategy Overview)

Allocations for May 2021 (Final)
Cash TLT LQD SPY

Momentum Investing Strategy (Strategy Overview)

Allocations for May 2021 (Final)
1st ETF 2nd ETF 3rd ETF

Momentum Investing

Do financial market prices reliably exhibit momentum? If so, why, and how can traders best exploit it? These blog entries relate to momentum investing/trading.

SPY-TLT Allocation Momentum?

A subscriber suggested review of the “SPY-TLT Universal Investment Strategy”, which each day allocates 100% of funds to SPDR S&P 500 (SPY) and/or iShares 20+ Year Treasury Bond (TLT) with SPY-TLT allocations equal to that with the best risk-adjusted daily performance over the past few months. There are 11 SPY-TLT allocation percentage choices: 100-0, 90-10, 80-20, 70-30, 60-40, 50-50, 40-60, 30-70, 20-80, 10-90 and 0-100. We test a simplified version of the strategy as follows:

  1. Each trading day, calculate dividend-adjusted close-to-close SPY and TLT returns.
  2. As soon as enough days are available, calculate the ratio of average daily return to standard deviation of daily returns over the past 63 trading days (about three months) for each of the 11 allocation choices. This lookback interval is common for such analyses and is within the lookback interval range of 50-80 days suggested by the author.
  3. For each day thereafter, maintain a portfolio with SPY-TLT allocations equal to those of the winning allocation choice over the specified lookback interval. We consider both same-close (requiring slight anticipation of the winning allocation choice) and next-open rebalancing executions (because such anticipation appears problematic).

We ignore small rebalancing frictions incurred daily when the allocation does not change. We initially ignore rebalancing frictions when the allocation does change, but then perform a frictions sensitivity test. Using daily dividend-adjusted opening and closing prices for SPY and TLT during July 30, 2002 (limited by TLT) through April 20, 2021, we find that: Keep Reading

SACEMS, SACEVS and Trading Calendar Updates

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.

We have updated the Trading Calendar to incorporate data for April 2021.

Preliminary SACEMS and SACEVS Allocation Updates

The home page, Simple Asset Class ETF Momentum Strategy (SACEMS) and Simple Asset Class ETF Value Strategy (SACEVS) now show preliminary positions for May 2021. The top three SACEMS ETFs are unlikely to change by the close, but second and third places are close. SACEVS Weighted allocations may shift slightly with final data.

Simple Term Structure ETF/Mutual Fund Momentum Strategy

Does a simple relative momentum strategy applied to tradable U.S. Treasury term structure proxies produce attractive results by picking the best duration for exploiting current interest rate trend? To investigate, we run short-term and long-term tests. The short-term test employs four exchange-traded funds (ETF) to represent the term structure:

SPDR Barclays 1-3 Month T-Bill (BIL)
iShares 1-3 Year Treasury Bond (SHY)
iShares Barclays 7-10 Year Treasury Bond (IEF)
iShares Barclays 20+ Year Treasury Bond (TLT)

The second test employs three Vanguard mutual funds to represent the term structure:

Vanguard Short-Term Treasury Fund (VFISX)
Vanguard Intermediate-Term Treasury Fund (VFITX)
Vanguard Long-Term Treasury Fund (VUSTX)

For each test, we allocate all funds at the end of each month to the fund with the highest total return over a specified ranking (lookback) interval, ranging from one month to 12 months. To accommodate the longest lookback interval, portfolio formation commences 12 months after the start of the sample. We focus on compound annual growth rate (CAGR) and maximum drawdown (MaxDD) as key performance metrics. Using monthly dividend-adjusted closing prices for BIL since May 2007, for SHY, IEF and TLT since July 2002 and for VFISX, VFITX and VUSTX since October 1991, all through March 2021, we find that: Keep Reading

Stock Factor/Anomaly Momentum

Do published stock factors exhibit performance streaks exploitable via intrinsic (absolute, or time series) and relative (cross-sectional) momentum? In the March 2021 revision of their paper entitled “Factor Momentum and the Momentum Factor”, Sina Ehsani and Juhani Linnainmaa investigate stock factor portfolio monthly time series and cross-sectional momentum. They consider 15 factors for U.S. stocks (size, value, profitability, investment, momentum, accruals, betting against beta, cash flow-to-price, earnings-to-price, liquidity, long-term reversals, net share issuance, quality minus junk, residual variance and short-term reversals) and seven of these factors for global stocks. Each factor portfolio is long (short) stocks with higher (lower) expected returns based on that factor. They each month measure factor momentum as factor portfolio return from 12 months ago to one month ago. They consider six factor momentum strategies and one benchmark strategy that all exclude the stock momentum factor and are all rebalanced monthly and equal-weighted, as follows:

  • Time Series Winners –  long factor portfolios with positive momentum.
  • Time Series Losers – long factor portfolios with negative momentum.
  • Time Series Hedge– long Time Series Winners and short Time Series Losers.
  • Cross-sectional Winners –  long factor portfolios with above-median momentum.
  • Cross-sectional Losers – long factor portfolios with below-median momentum.
  • Cross-sectional Hedge – long Cross-sectional Winners and short Cross-sectional Losers.
  • Benchmark – long all factor portfolios.

Using monthly returns as available for the 15 U.S. stock anomalies since July 1963 and seven of these anomalies applied to global stocks since July 1990, all through December 2019 (mostly Kenneth French data), they find that: Keep Reading

Longer Test of Simplest Asset Class ETF Momentum Strategy

A subscriber asked for an extended test of a very simple momentum strategy that each month holds Vanguard 500 Index Fund Investor Shares (VFINX) or Vanguard Long-Term Treasury Fund Investor Shares VUSTX according to which of these funds has the highest total return over the last three months. To investigate, based on the way mutual funds report prices, we calculate past 3-month total returns using dividend-adjusted prices for month-ends and strategy returns using dividend adjusted prices for first days of the following month. We assume zero fund switching costs and no restrictions on monthly fund switching. We use buying and holding VFINX as a benchmark. Using the specified fund price series and monthly 3-month U.S. Treasury bill (T-bill) yield from the end of May 1986 (limited by VUSTX) through the beginning of March 2021, we find that: Keep Reading

SACEMS with Margin

Is leveraging with margin a good way to boost the performance of the “Simple Asset Class ETF Momentum Strategy” (SACEMS)? To investigate effects of margin, we augment SACEMS by: (1) initially applying 2X leverage via margin (limited by Federal Reserve Regulation T); (2) for each month with a positive portfolio return, adding margin at the end of the month to restore 2X leverage; and, (3) for each month with a negative portfolio return, liquidating shares at the end of the month to pay down margin and restore 2X leverage. Margin rebalancings are concurrent with portfolio reformations. We focus on gross monthly Sharpe ratiocompound annual growth rate (CAGR) and maximum drawdown (MaxDD) for committed capital as key performance statistics for the Top 1, equally weighted (EW) Top 2 and EW Top 3 portfolios of monthly winners. We use the 3-month Treasury bill (T-bill) yield as the risk-free rate and consider a range of margin interest rates as increments to this yield. Using monthly gross total returns for SACEMS and monthly T-bill yields during July 2006 through February 2021, we find that:

Keep Reading

Simple Sector ETF Momentum Strategy Update/Extension

“Simple Sector ETF Momentum Strategy” investigates performances of simple momentum trading strategies for the following nine sector exchange-traded funds (ETF) executed with Standard & Poor’s Depository Receipts (SPDR):

Materials Select Sector SPDR (XLB)
Energy Select Sector SPDR (XLE)
Financial Select Sector SPDR (XLF)
Industrial Select Sector SPDR (XLI)
Technology Select Sector SPDR (XLK)
Consumer Staples Select Sector SPDR (XLP)
Utilities Select Sector SPDR (XLU)
Health Care Select Sector SPDR (XLV)
Consumer Discretionary Select SPDR (XLY)

Here, we update the principal strategy and extend it by adding equally weighted combinations of the top two and top three sector ETFs, along with corresponding robustness tests and benchmarks. We present findings in formats similar to those used for the Simple Asset Class ETF Momentum Strategy and the Simple Asset Class ETF Value Strategy. Using monthly dividend-adjusted closing prices for the sector ETFs and SPDR S&P 500 (SPY), 3-month U.S. Treasury bill (T-bill) yield and S&P 500 Index level during December 1998 through December 2020, we find that: Keep Reading

Recent Weaknesses of Factor Investing

How have value, quality, low-volatility and momentum equity factors, and combinations of these factors, performed in recent years. In their October 2020 paper entitled “Equity Factor Investing: Historical Perspective of Recent Performance”, Benoit Bellone, Thomas Heckel, François Soupé and Raul Leote de Carvalho review and put into context recent performances of these these factors/combinations as applied to medium-capitalization and large-capitalization World, U.S. and European stock universes. They consider both long-short and long-only factor portfolios and further investigate effects of (1) neutralizing beta and sector dependencies, (2) using multiple metrics for each factor and (3) including small stocks. Using firm accounting data and stock returns to support factor portfolio construction during 1995 through early 2020, they find that:

Keep Reading

SACEVS-SACEMS for Value-Momentum Diversification

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 November 2020, we find that: Keep Reading

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