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Not the Simplest Asset Class ETF Momentum Strategy

Posted in Momentum Investing

Does adding international equity exposure and an escape to "cash" enhance performance of a relative momentum strategy that switches between stock and U.S. Treasury bond exchange-traded funds (ETF)? In his February 2018 paper entitled "Simple and Effective Market Timing with Tactical Asset Allocation Part 2 - Choices", Lewis Glenn updates and considers two extensions to a strategy summarized in "Simplest Asset Class ETF Momentum Strategy?" that each month holds SPDR S&P 500 (SPY) or iShares Barclays 20+ Year Treasury Bond (TLT) depending on which has the higher total return over the last three months. Specifically, the three strategies are:

  1. Pair Switching (PS) - the original strategy as described above.
  2. Quint Switching (QS) - adds iShares MSCI EAFE (EFA), PowerShares QQQ (QQQ) and iShares MSCI Emerging Markets (EEM) to the asset universe, each month picking the top performer.
  3. Quint Switching Filtered (QSF) - modifies QS by adding a rule that if any of SPY, TLT, EFA, QQQ and EFA have non-positive returns over the lookback interval, switch to iShares Barclays 7-10 Year Treasury (IEF) . 

For all strategies, he includes 0.1% switching frictions for each buy and sell action. He focuses on compound annual growth rate (CAGR) and maximum drawdown (DDDmax) as key strategy performance metrics. He considers momentum ranking (lookback) intervals of 1 to 5 months to determine the optimal interval for the two strategy extensions. Using monthly dividend-adjusted closes of the specified funds during April 2004 through January 2018, he finds that:

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