Dual ETF Momentum Update

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 |  Includes: CIU, GLD, HYG, REM, SHY, TLT, VEU, VNQ, VTI
by: Scott's Investments

In February I announced a new "Dual ETF Momentum" spreadsheet. The idea was inspired by a paper written by Gary Antonacci and available on Optimal Momentum.

The spreadsheet is available on Scott's Investment's here. The objective of the spreadsheet is to track four pairs of ETFs and provide an "Invested" signal for the ETF in each pair with the highest relative 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 bill ETF (a "cash" filter). 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 the cash ETF. This is the absolute momentum filter which is detailed in depth by Antonacci, and has historically helped increase risk-adjusted returns.

I have added an "average" return signal for each ETF 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.

Below are the five portfolios along with current signals. As you can see, the signals are the same with the exception of the Economic Stress portfolio. TLT has slightly higher 12-month returns than SHY. However, TLT and GLD both have lower 3/6/12 returns than SHY:

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 17.93 14.07 Invested Invested
International Equities VEU 11.89 11.57
Cash SHY 0.36 0.14
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 11.22 6.27 Invested Invested
Interm Credit Bond CIU 4.49 1.78
Cash SHY 0.36 0.14
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 18.25 11.29
Mortgage REIT REM 25.16 15.46 Invested Invested
Cash SHY 0.36 0.14
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 -6.5 -6.8
Long-term Treasuries TLT 0.64 -5.23 Invested
Cash SHY 0.36 0.14 Invested
Return data courtesy of Finviz
Click to enlarge

As an added bonus, the spreadsheet also has four additional sheets using a dual momentum strategy with broker specific commission-free ETFs. 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. Also, the dual momentum strategy has historically had relatively low turnover.