DUAL MOMENTUM ETF PORTFOLIO FOR DECEMBER

Scott’s Investments provides a free “Dual ETF Momentum” spreadsheet which was originally created in February 2013. The strategy was inspired by a paper written by Gary Antonacci and available on Optimal Momentum.

Antonacci has a new book out, Dual Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk. If you want to see how he applies Dual Momentum to a portfolio strategy I encourage you to read the book.

My Dual ETF Momentum spreadsheet is available here and the objective is to track four pairs of ETFs and provide an “Invested” signal for the ETF in each pair with the highest relative momentum. Invested signals also require positive absolute momentum, hence the term “Dual Momentum”.

Relative momentum is gauged by the 12 month total returns of each ETF. The 12 month total returns of each ETF is also compared to a short-term Treasury ETF (a “cash” filter) in the form of iShares Barclays 1-3 Treasury Bond ETF (SHY). In order to have an “Invested” signal the ETF with the highest relative strength must also have 12-month total returns greater than the 12-month total returns of SHY. This is the absolute momentum filter which is detailed in depth by Antonacci, and has historically helped increase risk-adjusted returns.

An “average” return signal for each ETF is also available on the spreadsheet. The concept is the same as the 12-month relative momentum. However, the “average” return signal uses the average of the past 3, 6, and 12 (“3/6/12″) month total returns for each ETF. The “invested” signal is based on the ETF with the highest relative momentum for the past 3, 6 and 12 months. The ETF with the highest average relative strength must also have an average 3/6/12 total returns greater than the 3/6/12 total returns of the cash ETF.

Portfolio123 was used to test a similar strategy using the same portfolios and combined momentum score (“3/6/12″).  The test results were posted in the 2013 Year in Review.  Next month I will provide updated test results.

Below are the four portfolios along with current signals:

Return data courtesy of Finviz
Equity Representative ETF 1 Year % Total Returns Average of Quarterly/Half/Full Year % Returns Signal based on 1 year returns Signal based on average returns
US Equities VTI 15.48 7.68 Invested Invested
International Equities VEU -0.36 -5.37
Cash SHY 0.46 0.34
Credit Risk Representative ETF 1 Year % Total Returns Average of Quarterly/Half/Full Year % Returns Signal based on 1 year returns Signal based on average returns
High Yield Bond HYG 0.61 -2.33
Interm Credit Bond CIU 3.05 1.27 Invested Invested
Cash SHY 0.46 0.34
Real-Estate Risk Representative ETF 1 Year % Total Returns Average of Quarterly/Half/Full Year % Returns Signal based on 1 year returns Signal based on average returns
Equity REIT VNQ 31.52 18.19 Invested Invested
Mortgage REIT REM 22.33 9.06
Cash SHY 0.46 0.34
Economic Stress Representative ETF 1 Year % Total Returns Average of Quarterly/Half/Full Year % Returns Signal based on 1 year returns Signal based on average returns
Gold GLD -2.62 -2.5
Long-term Treasuries TLT 24.61 16.02 Invested Invested
Cash SHY 0.46 0.34

As an added bonus, the spreadsheet also has four additional sheets using a dual momentum strategy with broker specific commission-free ETFs for TD Ameritrade, Charles Schwab, Fidelity, and Vanguard. It is important to note that each broker may have additional trade restrictions and the terms of their commission-free ETFs could change in the future.

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Read more on Momentum at Wikinvest

Monday Readings

It is the holiday season and I have fallen way behind on my regular investment reads.  Below is a list of articles I am catching up on from the past 2 weeks:

Top 50 Trending Stocks

Millennial Investors Don’t Trust The Market – And They Shouldn’t – Read more at Meb Faber Research

Dilution, Index Evolution, and the Shiller CAPE: Anatomy of a Post-Crisis Value Trap – PHILOSOPHICAL ECONOMICS

7 Simple Things Most Investors Don’t Do – A Wealth of Common Sense

Is Bitcoin the Future? John Mauldin

Why the all-weather portfolio is a wash-out – Barry Ritholtz via The Washington Post

Price-to-Book Value Ratios: A Long-Term Winner with Long Periods of Underperformance - What Works on Wall Street

Beat the Average Investor by not Trying to “Beat the Market” - Pragmatic Capitalism

From ETF.com: Swedroe: Know The Risks, Stick To The Plan, The Best Inflation Protection, Passive Investing’s Foundations

Diversification or Deworsification? Dual Momentum

The World’s Dumbest Idea - James Montier of GMO

Alpha Architect: Our Robest Asset Allocation Solution & A Modification to the Flexible Asset Allocation Model

A New Twist on an Easy All-in-One Fund – WSJ (see also Finally a Free ETF from ETF Trends)

Investment Resources for Individuals