Leveraged Sector Fund Momentum Strategy
December 22, 2011 - Momentum Investing, Volatility Effects
A subscriber suggested applying simple momentum trading strategies to a set of leveraged equity style (size, value-growth) funds. It seems plausible that leverage may make funds react quickly and strongly to business cycle shifts that affect style performance. However, the costs of maintaining leverage are countervailing. Historical data for leveraged style funds is very limited, so we test instead a set of seven ProFunds 1.5X leveraged sector mutual funds, all of which have trading data back at least as far as December 2000:
ProFunds UltraSector Oil & Gas Inv (ENPIX)
ProFunds UltraSector Financials Inv (FNPIX)
ProFunds UltraSector Health Care Inv (HCPIX)
ProFunds Real Estate UltraSector Inv (REPIX)
ProFunds Telecom UltraSector Inv (TCPIX)
ProFunds Technology UltraSector Inv (TEPIX)
ProFunds Utilities UltraSector Inv (UTPIX)
As in “Simple Sector ETF Momentum Strategy Performance” and “Doing Momentum with Style (ETFs)”, we consider a basic momentum strategy that allocates all funds at the end of each month to the mutual fund with the highest total return over the past six months (6-1). We also consider a more cautious strategy that allocates all funds at the end of each month either to the mutual fund with the highest total return over the past six months or to cash depending on whether the S&P 500 Index is above or below its 10-month simple moving average (6-1;SMA10). Using monthly adjusted closing prices for the seven leveraged sector funds, the S&P 500 index, 3-month Treasury bills (T-bills) and S&P Depository Receipts (SPY) over the period December 2000 through November 2011 (132 months), we find that: Keep Reading