Different Weighting Schemes for SACEMS Portfolios?

A subscriber asked about backtesting two alternatives to equal weight (EW) for the Simple Asset Class ETF Momentum Strategy (SACEMS) Top 2 and Top 3 portfolios, as follows:

1. Fixed Weighted:
   • For Top 2, 66% allocation to the first-place exchange-traded fund (ETF) and 34% to the second-place ETF.
   • For Top 3, 50% allocation to the first-place ETF, 30% to the second-place ETF and 20% to the third-place ETF.
2. Variable Weighted: compute allocations based on ratios of momentum ranking interval returns.

To investigate, we compare SACEMS gross performance statistics of the alternative weighting schemes with those of the baseline EW scheme. For variable weights, if the past return of the third-place ETF is negative, we ignore it in Top 3 calculations. If the past return of the second-place ETF is negative, we ignore it in Top 2 calculations (allocating 100% to the first-place ETF, which never has negative past return). Using SACEMS input data through February 2023, we find that: (more…)