Dual ETF Momentum Portfolio: November Update And Backtests

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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 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 ETF (a "cash" filter) in the form of iShares Barclays 1-3 Treasury Bond ETF (NYSEARCA: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″). I did not require an ETF to be ranked above the combined return of SHY; rather, an ETF simply needed the average of its 13 week / 26 week / 52 week total return to be greater than 0% (the "absolute" momentum filter). Also, the portfolio re-balanced every 4 weeks as opposed to the end of each month. No considerations were made for taxes or commissions. The test time period was 11/11/08 - 11/11/13 and the benchmark is SPY:

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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 32.74 15.6 Invested Invested
International Equities VEU 20.01 9.54
Cash SHY 0.32 0.24
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 7.73 3.53 Invested Invested
Interm Credit Bond CIU -0.3 -0.26
Cash SHY 0.32 0.24
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 8.72 -0.99 Invested
Mortgage REIT REM -5.9 -8.54
Cash SHY 0.32 0.24 Invested
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 -26.19 -13.11
Long-term Treasuries TLT -15.91 -9.09
Cash SHY 0.32 0.24 Invested Invested
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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.

Disclosure: No positions