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Summary

  • This article lists and evaluates strategy ETFs based on momentum.
  • Three of them have more than $1 million in daily liquidity and a year in historical data.
  • Compared with the benchmark since inception, none have a convincing risk-adjusted performance.

Momentum has the reputation to be one of the market anomalies with the strongest abnormal return. This article looks into strategy ETFs based on individual stock momentum.

Hedge Funds typically charge a 2% management fee and a 20% performance fee. Investors are submitted to various constraints, among them a minimum capital and specific redemption dates. Momentum ETFs are charging less than 1% in net annual expense ratio, and shares can be traded by any investor at any time when the stock market is open. It makes them attractive for people who are not eligible as hedge fund customers. I have identified 6 products: the PowerShares DWA Momentum Portfolio ETF (NYSEARCA:PDP), the PowerShares DWA SmallCap Momentum Portfolio ETF (NYSEARCA:DWAS), the ELEMENTS SPECTRUM Large Cap U.S. Sector ETN (NYSEARCA:EEH), the iShares MSCI USA Momentum Factor Index ETF (NYSEARCA:MTUM), the SPDR S&P 1500 Momentum Tilt ETF (NYSEARCA:MMTM) and the First Trust Dorsey Wright Focus 5 ETF (NASDAQ:FV). Each of them is based on a deterministic rule-based strategy defined as an underlying index.

The first table gives a summary of their profiles:

Ticker

Inception

Expense

Dividend

Assets

Avg Daily Volume

PDP

3/1/2007

0.67%

0.28%

$1320 million

$10.5 million

DWAS

7/19/2012

0.60%

0.10%

$657 million

$35.7 million

EEH*

8/1/2007

0.75%

0%

$1.6 million

$13K

MTUM

4/16/2013

0.15%

0.70%

$241 million

$1.6 million

MMTM

10/24/2012

0.35%

1.76%

$12 million

$226K

FV

3/5/2014

0.95%

N/A

$103 million

$7 million

*Exchange Traded Note

Before going further, I will limit my selection to products with an average daily volume in dollar above 1 million, and at least 12 months of historical data. There are three: PDP, DWAS and MTUM.

The next table gives their detailed performances compared with the SPDR S&P 500 Trust ETF (SPY) over the last 12 months (since 4/16/2013 exactly).

Total Return

Maximum Drawdown

Sharpe ratio

Volatility

Correlation/ SPY

PDP

17.79%

-7.71%

1.13

13.68%

0.91

DWAS

21.67%

-12.77%

1.00

19.52%

0.81

MTUM

16.21%

-8.05%

0.89

15.56%

0.82

SPY

19.55%

-5.44%

1.58

10.94%

1

Dividends are included and reinvested. Statistics are calculated using OHLC price data. It means that the maximum drawdown is an intraday value. There may be different interpretations of Sharpe's formula and of how calculating the volatility (standard deviation), which may give different values. What is important is that all ETFs are evaluated in the same way.

The benchmark SPY has a better risk-adjusted performance (Sharpe ratio), a lower volatility and a smaller drawdown than the three momentum ETFs. DWAS is the only one to have a better total return: an alpha of 2%, at the price of an almost twice higher volatility and a more than twice bigger drawdown.

PDP and DWAS are older, and can be evaluated on a longer period. Since its inception date in 2007, PDP has a Sharpe ratio of 0.11 (below SPY at 0.14). Since its inception date in 2012, DWAS has a Sharpe ratio of 1.26 (below SPY at 1.6).

In fact, none of these ETFs looks attractive when compared to the benchmark, especially considering expenses. It confirms my research and simulations on longer periods: the momentum anomaly works with aggregate assets like sector ETFs, but it doesn't seem to be so profitable when used alone on individual stocks. It may be used profitably in association with other technical or fundamental factors that are not taken into account by these ETFs.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Momentum ETFs: Really A Good Idea?