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Simple Asset Class ETF Momentum Strategy (SACEMS) Update

Posted in Momentum Investing, Strategic Allocation

Does a simple relative momentum strategy applied to tradable asset class proxies produce attractive results? To investigate, we test a simple strategy on the following eight asset class exchange-traded funds (ETF), plus cash:

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)

This set of ETFs offers: (1) opportunities to capture momentum across global developed and emerging equity markets, large and small U.S. equities and bonds and commodities; (2) gold and cash as safe havens; (3) histories long enough for backtesting across multiple market environments; and, (4) simplicity of computation and recognition of the trade-off between number of ETFs and trading frictions. We rank ETFs based on total (dividend-adjusted) returns over past (lookback) intervals of one to 12 months. We consider portfolios of past ETF 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 ETFs, rebalanced monthly (EW All); buying and holding SPY (SPY); and, holding SPY when the S&P 500 Index is above its 10-month simple moving average (SMA10) and Cash when the index is below its SMA10 (SPY:SMA10). Using monthly dividend-adjusted closing prices for the asset class proxies and the yield for Cash during February 2006 (when all ETFs are first available) through March 2019, we find that:

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