Dual Momentum: How To Implement Strategy For Higher Returns With Lower Risk

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Includes: TLT, VEA, VTI
by: Lowell Herr

Summary

Dual Momentum utilizes relative strength momentum and absolute momentum.

Strategy requires only three ETFs.

Strategy increases return while reducing portfolio volatility.

Dual Momentum is the king and queen of all market anomalies.

Dual Momentum is an innovative investing strategy developed by Gary Antonacci, where dual combines relative strength momentum with absolute momentum into a winning investing model. Relative strength momentum compares the trend of one security with respect to another security while absolute momentum examines the trend of an asset with respect to its own past history. In the following example we use a one-year look-back as recommended by Antonacci.

The steps to implement the Dual Momentum Strategy are quite simple and are made even easier for the user if the decisions are programmed into a workable spreadsheet, as shown below.

Before explaining the steps to implementation, there are multiple references to this portfolio management model right here on Seeking Alpha as well as a review of Antonacci's book. Check out this link for another view of the Dual Momentum strategy, as well as further insights provided by the book.

Steps to Implement Dual Momentum Strategy:

The three ETFs are my selections to represent U.S. Equities, International Equities, and a Treasury ETF that provides drawn-down protection.

1. Select three securities to provide global diversification.

  • Vanguard Total Stock Market ETF (NYSEARCA:VTI)
  • Vanguard FTSE Developed Markets ETF (NYSEARCA:VEA)
  • iShares 20+ Year Treasury Bond (NYSEARCA:TLT)

2. Each month compare the most recent 12-month performance of VTI with VEA.

  • If VTI > VEA for the past year, compare VTI with TLT.
  • If VTI > TLT in performance over the past year, buy and hold VTI.
  • If VTI < VEA, go to step #3.

3. If the performance of VTI < VEA, run these screens.

  • Now compare the most recent 1-year performance of VEA with TLT.
  • If VEA > TLT, buy and hold VEA.
  • If VEA < TLT, buy and hold TLT.

The following screen-shot shows a table that differs slightly from the above instructions. SHY, a low volatile treasure ETF, is included as a cutoff security. For example, no ETF performing below SHY is a candidate for purchase. Introducing SHY does not change the Dual Momentum model unless all three ETFs under-perform SHY, at which point all money is invested in SHY or a money market. VEA, for example, is eliminated from purchase right now on two counts. 1) It is under-performing SHY and 2) Both VTI and TLT are performing better than VEA when using a 12-month look-back period.

Based on the three steps outlined above and/or using the Dual Momentum spreadsheet, an investor would currently hold all money in TLT as neither VTI or VEA are performing above TLT based on both relative strength momentum and absolute momentum criteria.

Investors interested in the merits of this investing model are encouraged to read Antonacci's book, Dual Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk.

The Dual Momentum portfolio strategy is undergoing out-of-sample testing and results will follow in a few months.

Disclosure: The author is long VTI, VEA, TLT, SHY.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.