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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.

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The Decision Moose Asset Allocation Framework

A reader requested review of the Decision Moose asset allocation framework. Decision Moose is “an automated stock, bond, and gold momentum model developed in 1989. Index Moose uses technical analysis and exchange traded index funds (ETFs) to track global investment flows in the Americas, Europe and Asia, and to generate a market timing signal.” The trading system allocates 100% of funds to the index projected to perform best. The site includes a history of switch recommendations since the end of August 1996, with gross performance. To evaluate Decision Moose, we assume that switches and associated trading returns are as described (out of sample, not backtested) and compare the returns to those for dividend-adjusted SPDR S&P 500 (SPY) over the same intervals. Using Decision Moose signals/performance data and contemporaneous SPY prices during 8/30/96 through 10/19/18 (22+ years), we find that: Keep Reading

Momentum Strategy, Value Strategy and Trading Calendar Updates

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

We have updated the “Trading Calendar” to incorporate data for October 2018.

Preliminary Momentum Strategy and Value Strategy Updates

The home page“Momentum Strategy” and “Value Strategy” now show preliminary Simple Asset Class ETF Momentum Strategy (SACEMS) and Simple Asset Class ETF Value Strategy (SACEVS) positions for November 2018. For SACEMS, the top three positions are unlikely to change by the close, but their order may change. For SACEVS, allocations are very unlikely to change by the close.

Are Equity Multifactor ETFs Working?

Are equity multifactor strategies, as implemented by exchange-traded funds (ETF), attractive? To investigate, we consider seven ETFs, all currently available (in order of decreasing assets):

  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.
  • 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.

Because available sample periods are very short, we focus on daily return statistics, along with cumulative returns. We use four benchmarks according to fund descriptions: SPDR S&P 500 (SPY), iShares MSCI ACWI ex US (ACWX), SPDR S&P MidCap 400 (MDY) and iShares Russell 1000 (IWB). Using daily returns for the seven equity multifactor ETFs and benchmarks as available through September 2018, we find that: Keep Reading

Evolution of Quantitative Stock Investing

Quantitative investing involves disciplined rule-based approaches to help investors structure optimal portfolios that balance return and risk. How has such investing evolved? In their June 2018 paper entitled “The Current State of Quantitative Equity Investing”, Ying Becker and Marc Reinganum summarize key developments in the history of quantitative equity investing. Based on the body of research, they conclude that: Keep Reading

Are U.S. Equity Momentum ETFs Working?

Are U.S. stock and sector momentum strategies, as implemented by exchange-traded funds (ETF), attractive? To investigate, we consider five momentum-oriented U.S. equity ETFs with assets over $100 million, all currently available (in order of decreasing assets):

  • iShares Edge MSCI USA Momentum Factor (MTUM) – holds U.S. large-capitalization and mid-capitalization stocks with relatively high momentum.
  • First Trust Dorsey Wright Focus 5 (FV) – holds five equally weighted sector and industry ETFs selected via a proprietary relative strength methodology, reformed twice a month.
  • PowerShares DWA Momentum Portfolio (PDP) – invests at least 90% of assets in approximately 100 U.S. common stocks per a proprietary methodology designed to identify powerful relative strength characteristics, reformed quarterly.
  • SPDR Russell 1000 Momentum Focus (ONEO) – tracks the Russell 1000 Momentum Focused Factor Index, picking U.S. stocks that have recently outperformed.
  • First Trust Dorsey Wright Dynamic Focus 5 ETF (FVC) – similar to FV but with added risk management via an increasing allocation to cash equivalents when relative strengths of more than one-third of the universe diminish relative to a cash index, reformed twice a month.

Because some sample periods are very short, we focus on daily return statistics, but also consider cumulative returns and maximum drawdowns (MaxDD). We use two benchmark ETFs, iShares Russell 1000 (IWB) and iShares Russell 3000 (IWV), according to momentum fund descriptions. Using daily returns for the five momentum funds and the two benchmarks as available through mid-September 2018, we find that: Keep Reading

A Few Notes on Muscular Portfolios

Brian Livingston introduces his 2018 book, Muscular Portfolios: The Investing Revolution for Superior Returns with Lower Risk, as follows: “What we laughingly call the financial ‘services’ industry is a cesspool filled with sharks intent on siphoning your money away and making it their own. The good news is that it is absolutely possible to grow your savings with no fear of financial sharks or stock market crashes. In the past few years, we’ve seen an explosion of low-cost index funds, along with serious mathematical breakthroughs in how to combine these funds into low-risk portfolios. …This book shows you how.  …You can start with just a little money and make it grow.” Based on research from multiple sources and extensions of that research, he concludes that: Keep Reading

Simple Currency ETF Momentum Strategy

Do exchange-traded funds (ETF) that track major currencies support a relative momentum strategy? To investigate, we consider the following four ETFs:

Invesco DB US Dollar Bullish (UUP)
Invesco CurrencyShares Euro Currency (FXE)
Invesco CurrencyShares Japanese Yen (FXY)
WisdomTree Chinese Yuan Strategy (CYB)

We each month rank these ETFs based on past return over lookback intervals ranging from one to 12 months. We consider portfolios of past winners reformed monthly based on Top 1 and on equally weighted (EW) Top 2 and Top 3 ETFs. The benchmark portfolio is the equally weighted combination of all four ETFs. 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 adjusted closing prices for the currency ETFs during March 2007 (when three become available) through August 2018, we find that: Keep Reading

SACEMS with Different Alternatives for “Cash”

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)
iShares TIPS Bond (TIP)

In other words, we add one of the five risk-free assets to the following base set of eight ETFs:

PowerShares DB Commodity Index Tracking (DBC)
iShares MSCI Emerging Markets Index (EEM)
iShares MSCI EAFE Index (EFA)
SPDR Gold Shares (GLD)
iShares Russell 2000 Index (IWM)
SPDR S&P 500 (SPY)
iShares Barclays 20+ Year Treasury Bond (TLT)
Vanguard REIT ETF (VNQ)

We focus on the equally weighted (EW) EW Top 3 SACEMS portfolio and consider all performance metrics used for base SACEMS. Using end-of-month total (dividend-adjusted) returns for the specified assets during February 2006 (except May 2007 for BIL) through July 2018, we find that:

Keep Reading

SACEMS Applied to Mutual Funds

A subscriber inquired whether a longer test of the “Simple Asset Class ETF Momentum Strategy” (SACEMS) is feasible using mutual funds rather than exchange-traded funds (ETF) as asset class proxies. To investigate, we consider the following set of mutual funds (partly adapted from the paper summarized in “Asset Allocation Combining Momentum, Volatility, Correlation and Crash Protection”):

Oppenheimer Commodity Strategy Total Return A (QRAAX) until its discontinuation in mid-2016, and PIMCO CommoditiesPLUS Strategy (PCPSX) thereafter.
Vanguard Emerging Markets Stock Index Investor Shares (VEIEX)
Fidelity Diversified International (FDIVX)
First Eagle Gold A (SGGDX)
Vanguard Total Stock Market Index Investor Shares (VTSMX)
Vanguard Small Capitalization Index Investor Shares  (NAESX)
Vanguard REIT Index Investor Shares (VGSIX)
Vanguard Long-Term Treasury Investor Shares (VUSTX)
3-month Treasury bills (Cash)

We rank mutual funds based on total (dividend-adjusted) returns over past (lookback) intervals of one to 12 months. We consider portfolios of past mutual fund winners based on Top 1 and on equally weighted (EW) Top 2 through Top 5. We consider as benchmarks: an equally weighted portfolio of all mutual funds, rebalanced monthly (EW All); buying and holding VTSMX; and, holding VTSMX when the S&P 500 Index is above its 10-month simple moving average (SMA10) and Cash when the index is below its SMA10 (VTSMX:SMA10). Using monthly dividend-adjusted closing prices for the above mutual funds and the yield for Cash during March 1997 through July 2018 (269 months), we find that: Keep Reading

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