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A Quick Rundown

Our Momentum Strategy tracks the performance of three versions of the Simple Asset Class ETF Momentum Strategy, which seeks strategic diversification across asset classes via ETFs plus a monthly tactical edge from intermediate-term momentum per the stream of research itemized in What Works Best?

Our Value Strategy tracks the performance of the Simple Asset Class ETF Value Strategy, a partial value complement to the Momentum Strategy that seeks diversification across a smaller set of asset class ETFs plus a monthly tactical edge from potential undervaluation of three risk premiums.

Current Value Allocations

ETF Value Signal for August 2020 (Final)

Cash

TLT

LQD

SPY

The asset with the highest allocation is the holding of the Best Value strategy.
Gross Compound Annual Growth Rates
(Since September 2002)
Best Value Weighted 60-40
12.4% 10.2% 8.2%
Strategy Overview
Read more about our Value Strategy
Current Momentum Allocations

ETF Momentum Signal for August 2020 (Final)

Winner ETF

Second Place ETF

Third Place ETF

Gross Compound Annual Growth Rates
(Since August 2006)
Top 1 ETF Top 2 ETFs
% %
Top 3 ETFs SPY
% %
Strategy Overview
Read more about our Momentum Strategy

Use Both Strategies for Diversification

Are the "Simple Asset Class ETF Value Strategy" (SACEVS) and the "Simple Asset Class ETF Momentum Strategy" (SACEMS) mutually diversifying. To check, we look at three equal-weighted (50-50) combinations of the two strategies, rebalanced monthly:

  1. SACEVS Best Value paired with SACEMS Top 1 (aggressive value and aggressive momentum).
  2. SACEVS Best Value paired with SACEMS Equally Weighted (EW) Top 3 (aggressive value and diversified momentum).
  3. SACEVS Weighted paired with SACEMS EW Top 3 (diversified value and diversified momentum).

We also test sensitivity of results to deviating from equal SACEVS-SACEMS weights. Using monthly gross returns for SACEVS and SACEMS portfolios since January 2003 for the first strategy and since June 2006 for the latter two, all through November 2019, we find that:

First, we look at SACEVS Best Value-SACEMS Top 1, aggressive value and aggressive momentum. The correlation of monthly returns between strategies over the available sample period is 0.33, indicating that they materially diversify each other.

The following chart plots gross cumulative values of $100,000 initial investments in each of SACEVS Best Value, SACEMS Top 1 and 50-50. The chart includes SPDR S&P 500 (SPY) for reference. Visual inspection suggests that 50-50 is attractively smooth. Quantitatively:

  • Average gross monthly returns (standard deviations of monthly returns) for SACEVS Best Value, SACEMS Top 1 and 50-50 are 1.0% (3.4%), 1.2% (5.0%) and 1.1% (3.5%), respectively, translating to rough monthly Sharpe ratios 0.31, 0.23 and 0.32.
  • Compound annual growth rates (CAGR) are 12.4%, 13.3% and 13.3%, respectively.
  • Maximum drawdowns (MaxDD) based on monthly data are -27%, -26% and -18%, respectively.

For another perspective, we look at calendar year returns.

The next chart summarizes gross annual returns for each of SACEVS Best Value, SACEMS Top 1 and 50-50 during 2003 through 2018. Average annual returns (standard deviations of annual returns) are 12.2% (12.9%), 14.8% (15.5%) and 13.6% (11.2%), respectively. Using average monthly yield on 3-month Treasury bills (T-bill) during a year as the risk-free rate for that year, corresponding gross annual Sharpe ratios are 0.76, 0.90 and 1.18. The 50-50 strategy has negative returns in 2015 and 2018.

Is a 50-50 mix optimal?

The next chart summarizes CAGR and MaxDD sensitivity to SACEVS Best Value and SACEMS Top 1 weights, ranging from 100% allocation to SACEVS Best Value (100-0) to 100% allocation to SACEMS Top 1 (0-100) since June 2006. The shorter sample period is for comparability with scenarios below. Results suggest that a slight tilt toward SACEVS Best Value may be attractive.

Next, we look at SACEVS Best Value-SACEMS EW Top 3, aggressive value and cautious momentum. The correlation of monthly returns between SACEVS Best Value and SACEMS EW Top 3 over the available sample period is 0.35, indicating that they materially diversify each other.

The following chart plots gross cumulative values of $100,000 initial investments in each of SACEVS Best Value, SACEMS EW Top 3 and 50-50, including SPY for reference. Visual inspection suggests that 50-50 is attractively smooth. Quantitatively:

  • Average gross monthly returns (standard deviations of monthly returns) for SACEVS Best Value, SACEMS EW Top 3 and 50-50 are 1.0% (3.6%), 0.9% (3.0%) and 1.0% (2.7%), respectively, translating to rough monthly Sharpe ratios 0.29, 0.31 and 0.37.
  • CAGRs are 12.3%, 11.3% and 12.0%, respectively.
  • MaxDDs based on monthly data are -27%, -13% and -15%, respectively.

For another perspective, we look at calendar year returns.

The next chart summarizes gross annual returns for each of SACEVS Best Value, SACEMS EW Top 3 and 50-50 over the available sample period, with 2006 partial starting in July. Average annual returns (standard deviations of annual returns) for 2007 through 2018 are 11.2% (13.5%), 11.7% (10.4%) and 11.5% (9.8%), respectively. Using average monthly T-bill yield during a year as the risk-free rate for that year, corresponding gross annual Sharpe ratios are 0.75, 1.04 and 1.05. The 50-50 strategy has negative returns in 2008, 2015 and 2018.

Is a 50-50 mix optimal?

The next chart summarizes CAGR and MaxDD sensitivity to SACEVS Best Value and SACEMS EW Top 3 weights, ranging from 100% allocation to SACEVS Best Value (100-0) to 100% allocation to SACEMS EW Top 3 (0-100). Results suggest that a slight tilt toward SACEMS EW Top 3 may be attractive.

Finally, we look at SACEVS Weighted-SACEMS EW Top 3, cautious value and cautious momentum. The correlation of monthly returns between SACEVS Weighted and SACEMS EW Top 3 over the available sample period is 0.47, indicating that they materially diversify each other.

The following chart plots gross cumulative values of $100,000 investments in each of SACEVS Weighted, SACEMS EW Top 3 and 50-50, including SPY for reference. Visual inspection suggests that 50-50 is attractively smooth. Quantitatively:

  • Average gross monthly returns (standard deviations of monthly returns) for SACEVS Weighted, SACEMS EW Top 3 and 50-50 are 0.9% (2.9%), 0.9% (3.0%) and 0.9% (2.5%), respectively, translating to rough monthly Sharpe ratios 0.31, 0.31 and 0.37.
  • CAGRs are 10.8%, 11.3% and 11.2%, respectively.
  • MaxDDs based on monthly data are -25%, -13% and -15%, respectively.

For another perspective, we look at calendar year returns.

The next chart summarizes gross annual returns for each of SACEVS Weighted, SACEMS EW Top 3 and 50-50 over the available sample period, with 2006 partial starting in July. Average annual returns (standard deviations of annual returns) for 2007-2018 are 9.4% (10.1%), 11.7% (10.4%) and 10.5% (8.6%), respectively. Using average monthly T-bill yield during a year as the risk-free rate for that year, corresponding gross annual Sharpe ratios are 0.81, 1.04 and 1.08. The 50-50 strategy has negative returns in 2008, 2015 and 2018.

Is a 50-50 mix optimal?

The final chart summarizes CAGR and MaxDD sensitivity to SACEVS Weighted and SACEMS EW Top 3 weights, ranging from 100% allocation to SACEVS Weighted (100-0) to 100% allocation to SACEMS EW Top 3 (0-100). Results suggest that a strong tilt toward SACEMS EW Top 3 may be attractive.

The following table summarizes some key gross annual performance statistics for the SACEVS-SACEMS diversified portfolios over available full-year sample periods. Results suggest the three approaches are comparable on a reward-for-risk basis.

In summary, evidence from available samples suggests that SACEMS and SACEVS usefully diversify each other.

Cautions regarding findings include:

  • Analyses ignore trading frictions associated with base strategies and with rebalancing the 50-50 combination each month. Frictions are higher for diversified versions of SACEVS and SACEMS pairs than for aggressive versions.
  • Available sample periods are very short for analysis of annual returns and sensitivity testing.
  • All ETFs used in the SACEMS Top 1 analysis are not available over the full sample period.
  • Testing multiple combinations on the same data introduces data snooping bias, such that the best combination overstates expectations.
  • Cautions outlined in "Simple Asset Class ETF Value Strategy" and "Simple Asset Class ETF Momentum Strategy" apply.

Where to next?

More about the Value Strategy More about the Momentum Strategy