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Alternative Momentum Metrics for SACEMS?

Posted in Momentum Investing, Strategic Allocation

A subscriber asked whether some different momentum metric might improve performance of the "Simple Asset Class ETF Momentum Strategy" (SACEMS), which each month reforms a portfolio of winners from the following universe based on total return over a specified lookback interval:

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)
3-month Treasury bills (Cash)

To investigate, we compare performances of the following alternative monthly momentum metrics to that of the original baseline metric:

  • Average monthly total returns over the lookback interval.
  • Slope of the dividend-adjusted price series over the lookback interval.
  • Sharpe ratio of the monthly total return series over the lookback interval (using Cash return as the risk-free rate, and setting the Sharpe ratio of Cash at zero).

We focus on the equally weighted (EW) Top 3 SACEMS portfolio. We consider all the performance metrics used for the baseline, with emphasis on compound annual growth rates (CAGR) and maximum drawdowns (MaxDD). Using monthly dividend adjusted closing prices for the asset class proxies and the yield for Cash over the period February 2006 (the earliest all ETFs are available) through May 2018 (148 months), we find that:

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