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Doing Momentum with Style (ETFs)

| | Posted in: Momentum Investing, Size Effect, Value Premium

"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 set momentum ranking (lookback) interval. We focus on the baseline ranking interval from the "Simple Asset Class ETF Momentum Strategy (SACEMS)", but test sensitivity of findings to ranking intervals ranging from one to 12 months. As benchmarks, we consider an equally weighted and monthly rebalanced combination of all six style ETFs (EW All), and buying and holding S&P Depository Receipts (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 consider the performance metrics used for SACEMS. Using monthly dividend-adjusted closing prices for the six style ETFs and SPY, monthly levels of theĀ S&P 500 index and monthly yields for T-bills during August 2001 (limited by IWS and IWP) through December 2019, we find that:

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