Momentum Investing

A subscriber requested evaluation of versions of the Simple Asset Class ETF Value Strategy (SACEVS), the Simple Asset Class ETF Momentum Strategy (SACEMS) and a combination of the two, as follows:

1. For SACEVS Best Value, which chooses the asset proxy for the term, credit or equity premium that is most undervalued (if any), use only every third signal rather than every monthly signal. We start these quarterly signals with the first available signal in July 2002.
2. For SACEMS Equal-Weighted (EW) Top 2, use only every third signal rather than every monthly signal, rebalancing to equal weights only with these quarterly signals. We align quarterly signals with those for SACEVS.
3. For the SACEVS-SACEMS combination, use 30%-70% weights (per “SACEVS-SACEMS for Value-Momentum Diversification”) and rebalance only quarterly. We align quarterly rebalancings with those for SACEVS.

The overall approach is to suppress trading by limiting portfolio reformations/rebalancings to quarterly, while retaining the informativeness of monthly inputs. We apply these changes and compare results to those for the tracked (baseline) versions of SACEVS Best Value, SACEMS EW Top 2 and their 50%-50% combination. Using monthly SACEMS and SACEVS data during July 2006 (limited by availability of a commodities proxy in SACEMS) through June 2024, we find that: Keep Reading

“Beat the Market with Hot-Anomaly Switching?” concludes that “a trader who periodically switches to the hottest known anomaly based on a rolling window of past performance may be able to beat the market. Anomalies appear to have their own kind of momentum.” Does momentum therefore work for style-based exchange-traded funds (ETF)? To investigate, we apply a simple momentum strategy to the following six ETFs that cut across market capitalization (large, medium and small) and value versus growth:

iShares Russell 1000 Value Index (IWD) – large capitalization value stocks.
iShares Russell 1000 Growth Index (IWF) – large capitalization growth stocks.
iShares Russell Midcap Value Index (IWS) – mid-capitalization value stocks.
iShares Russell Midcap Growth Index (IWP) – mid-capitalization growth stocks.
iShares Russell 2000 Value Index (IWN) – small capitalization value stocks.
iShares Russell 2000 Growth Index (IWO) – small capitalization growth stocks.

We test a simple Top 1 strategy that allocates all funds each month to the one style ETF with the highest total return over a specified momentum ranking (lookback) interval. We focus on a 6-month ranking interval as often used in prior research, but test sensitivity of findings to ranking intervals ranging from one to 12 months. As benchmarks, we consider an equal-weighted and monthly rebalanced combination of all six style ETFs (EW All), and buying and holding SPDR S&P 500 (SPY). As an enhancement we consider holding the Top 1 style ETF (3-month U.S. Treasury bills, T-bills) when the S&P 500 Index is above (below) its 10-month simple moving average at the end of the prior month (Top 1:SMA10), with a benchmark substituting SPY for Top 1 (SPY:SMA10). We employ the performance metrics used for SACEMS. Using monthly dividend-adjusted closing prices for the six style ETFs and SPY, monthly levels of the S&P 500 Index and monthly yields for T-bills during August 2001 (limited by IWS and IWP) through June 2024, we find that:

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“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 equal-weighted combinations of the top two and top three sector ETFs, along with corresponding robustness tests and benchmarks. Using monthly dividend-adjusted closing prices for the sector ETFs and SPDR S&P 500 ETF Trust (SPY), 3-month U.S. Treasury bill (T-bill) yield and S&P 500 Index level during December 1998 through June 2024, we find that: Keep Reading

Does adding an exchange-traded fund (ETF) or note (ETN) to the Simple Asset Class ETF Momentum Strategy (SACEMS) boost performance via consideration of more trending/diversifying options? To investigate, we add the following 25 ETF/ETN asset class proxies one at a time to the base set and measure effects on the Top 1, equally weighted (EW) Top 2 and EW Top 3 SACEMS portfolios:

Alerian MLP ETF (AMLP)
VanEck Vectors BDC Income (BIZD)
Vanguard Total Bond Market (BND)
SPDR Barclays International Treasury Bond (BWX)
Invesco DB Agriculture Fund (DBA)
iShares MSCI Emerging Markets (EEM)
iShares MSCI Frontier 100 (FM)
First Trust US IPO Index (FPX)
iShares iBoxx High-Yield Corporate Bond (HYG)
iShares 7-10 Year Treasury Bond (IEF)
iShares Latin America 40 (ILF)
iShares National Muni Bond ETF (MUB)
Invesco Closed-End Fund Income Composite (PCEF)
Invesco Global Listed Private Equity (PSP)
IQ Hedge Multi-Strategy Tracker (QAI)
Invesco QQQ Trust (QQQ)
SPDR Dow Jones International Real Estate (RWX)
ProShares UltraShort S&P 500 (SDS)
iShares Short Treasury Bond (SHV)
ProShares Short 20+ Year Treasury (TBF)
iShares TIPS Bond (TIP)
United States Oil (USO)
Invesco DB US Dollar Index Bullish Fund (UUP)
ProShares VIX Short-Term Futures (VIXY)
ProShares VIX Mid-Term Futures (VIXM)

We focus on gross compound annual growth rate (CAGR) and gross maximum drawdown (MaxDD) as key performance statistics, ignoring monthly reformation costs. Using end-of-month, dividend-adjusted returns for all assets as available during February 2006 through June 2024, we find that: Keep Reading

Are all of the potentially trending/diversifying asset class proxies used in the Simple Asset Class ETF Momentum Strategy (SACEMS) necessary? Might one or more of them actually be harmful to performance? To investigate, we each month rank the nine SACEMS assets based on past return with one excluded (nine separate test series) and reform the Top 1, equally weighted (EW) Top 2 and EW Top 3 SACEMS portfolios. We focus on gross compound annual growth rate (CAGR) and gross maximum drawdown (MaxDD) as key performance statistics, ignoring monthly portfolio reformation costs. Using end-of-month, dividend-adjusted returns for SACEMS assets during February 2006 through June 2024, we find that: Keep Reading

Is industry trend-following an attractive strategy over the long run? In their June 2024 paper entitled “A Century of Profitable Industry Trends”, Carlo Zarattini and Gary Antonacci evaluate the long-term performance of a long-only industry trend-following (Timing Industry) strategy, modeled as follows:

• Entry – buy an industry when its daily closing price crosses above the upper band of either its 20-day Keltner Channel (with a multiplier of 2 for the high-low price range component) or its 20-day Donchian Channel.
• Sizing – each day for each open position, calculate 14-day past return volatility as an estimate of its future volatility and resize all open positions so that they contribute equally to overall portfolio volatility, limiting overall portfolio leverage to 200%.
• Exit – each day for each open position, close the position if it crosses below a stop loss represented by the lower band of either its 40-day Keltner Channel (again with a multiplier of 2 for the high-low price range component) or its 40-day Donchian Channel. However, do not ever lower the stop loss. When a position closes, reinvest proceeds into 1-month U.S. Treasury bills.

For a long-term test, they apply these rules to nearly 98 years of daily returns for 48 hypothetical annually rebalanced, capitalization-weighted industry portfolios constructed by assigning a Standard Industrial Classification (SIC) Code to each stock traded on NYSE, AMEX and NASDAQ. For a recent and more realistic test, they apply these rules to 31 sector exchange-traded funds (ETF) offered by State Street Global Advisors. Utilizing daily returns for the 48 industry portfolios since July 1926 and for the 31 sector ETFs as available (inceptions January 2005 to June 2018), all through March 2024, they find that:

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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 June 2024.

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

Are there interactions between stock return momentum and days of the week? In their March 2024 paper entitled “Same-Weekday Momentum”, Zhi Da and Xiao Zhang investigate how momentum interacts with days of the week. They first perform regression tests to evaluate abilities of same-day and other-day past returns to predict day-of-the-week momentum. They then evaluate economic significance of findings by comparing three trading strategies:

1. Standard Momentum – each month, reform a value-weighted hedge portfolio that is long (short) stocks that are in the top (bottom) tenth, or decile, of stocks with the highest (lowest) average monthly returns from 12 months ago to one month ago.
2. Same-Weekday Momentum – each weekday during a month, reform a value-weighted hedge portfolio that is long (short) the decile of stocks with the highest (lowest) average daily returns on the same day of the week from 12 months ago to one month ago.
3. Other-Weekday Momentum – each weekday during a month, reform a value-weighted hedge portfolio that is long (short) the decile of stocks with highest (lowest) average daily returns on other weekdays from 12 months ago to one month ago.

Using daily data for publicly listed U.S. stocks, excluding those priced less than $5 and those in the bottom tenth of NYSE market capitalizations, during 1963 through 2021 and daily equity fund/institutional trading data as available, they find that: Keep Reading

A subscriber asked about the stability of the momentum measurement (lookback) interval used for strategies like the Simple Asset Class ETF Momentum Strategy (SACEMS). To investigate, we run two tests on each of top one (Top 1),  equal-weighted top two (EW Top 2) and equal-weighted top three (EW Top 3) versions of SACEMS:

1. Identify the SACEMS lookback interval with the highest gross compound annual growth rate (CAGR) for a sample starting February 2006 when Invesco DB Commodity Index Tracking Fund (DBC) becomes available and ending each of May 2012, 2013, 2014, 2015, 2016, 2017, 2018, 2019, 2020, 2021, 2022, 2023 and 2024. We consider lookback intervals of one to 12 months, meaning that earliest allocations are for February 2007 to accommodate the longest interval. The shortest sample period is therefore 5.3 years. This test takes the perspective of an investor who devises SACEMS in May 2012 and each year adds 12 months of data and checks whether the optimal lookback interval has changed.
2. Identify the SACEMS lookback interval with the highest gross CAGR for a sample ending May 2021 and starting each of February 2006, 2007, 2008, 2009, 2010, 2011, 2012, 2013, 2014, 2015, 2016, 2017, 2018 and 2019. The shortest sample period is again 5.3 years. This test takes perspectives of different investors who devise SACEMS at the end of February in different years.

Using monthly SACEMS inputs and the SACEMS model as currently specified for February 2006 through May 2024, we find that: Keep Reading