Objective research to aid investing decisions

Value Investing Strategy (Strategy Overview)

Allocations for December 2020 (Preliminary)
Cash TLT LQD SPY

Momentum Investing Strategy (Strategy Overview)

Allocations for December 2020 (Preliminary)
1st ETF 2nd ETF 3rd ETF

Simple Asset Class ETF Momentum Strategy (SACEMS)

As elaborated in "What Works Best?", a strategic allocation involving perhaps five to ten equally weighted asset classes available via low-fee exchange-traded funds (ETF) or mutual funds, with periodic rebalancing, is a simple way for individual investors to harvest uncorrelated volatility over the long term. For investors seeking an active (tactical) edge, there is evidence supporting exploitation of intermediate-term relative momentum of asset class proxies.

The Simple Asset Class ETF Momentum Strategy (SACEMS) seeks diversification plus a monthly tactical edge by holding a few top-performing ETFs. We consider three versions of SACEMS, which at the end of each month allocate all funds to the top one (Top 1), the equally weighted top two (EW Top 2) or the equally weighted top three (EW Top 3) asset class ETFs from a diversified set of nine, based on total return over recent months.

Supporting research includes (items may at times be unavailable for a few days during updates and may use an old strategy vintage):

Some investors may want to follow one of the alternatives tracked here. Others may want to adapt them with modifications suited to their individual goals and constraints. Still others may want to apply the analysis approaches to test other strategies. Something to keep in mind is that adding complexity to a strategy increases the number of ways to optimize it in backtests and thereby elevates potential for data snooping bias.

The next section summarizes historical (backtest) performance data.

Historical Performance

The following chart shows the gross cumulative values of $100,000 initial investments in SACEMS Top 1, EW Top 2 and EW Top 3 since the end of June 2006 (based on availability of ETF data). The chart includes three benchmarks: (1) an equally weighted, monthly rebalanced portfolio of all ETFs in the SACEMS universe (EW All), indicative of simple diversification; (2) buying and holding SPDR S&P 500 (SPY); and, (3) SPY:SMA10, a simple timing strategy that holds SPY (Cash) when the S&P 500 Index is above (below) its 10-month simple moving average.

Results indicate that SACEMS is attractive, but has setbacks.

For perspective, we look at an array of performance metrics.

The following table summarizes some monthly statistics for these same strategies over the available sample period. Return/Risk is average return divided by standard deviation. Maximum (peak-to-trough) drawdowns are based on monthly measurements over the sample period. 

The next table summarizes annual/annualized returns for these strategies over different intervals commonly used to describe performance of funds. The annualized returns are compound annual growth rates (CAGR). Only the longest measurement intervals include a major equity bear market. For Sharpe ratio, to calculate excess annual return, we use average monthly yield on 3-month Treasury bills during a year as the risk-free rate for that year.

The next section offers a discussion of this performance.

Momentum Signal for December 2020 (Preliminary)

Winner ETF

Second Place ETF

Third Place ETF

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