Momentum is an investment strategy that has been around for years, but became popular when Gary Antonacci published his Dual Momentum Investing book in 2015. In the first analysis the Antonacci dual momentum "rules" are followed when it comes to the 12-month look-back period and investing 100% of the portfolio in one ETF, be it U.S. Equities (NYSEARCA:VTI), International Equities (NYSEARCA:VEU), or Bonds (NYSEARCA:AGG). I deviated from the securities mentioned in the Dual Momentum (DM) book as these are commission free ETFs for TDAmeritrade clients. For other discount brokers, substitute inexpensive ETFs that cover these three major asset classes.
Dual Momentum Recommendations: Going into April, dual momentum investors are 100% invested in AGG since both VTI and VEU are under-performing SHY, our cutoff ETF. For an additional explanation of how the dual momentum strategy works, check out this link. Better still, read Antonacci's book. A 12-month look-back period was used and over that time span, bonds is the top performer. Had AGG underperformed SHY, we would still be invested in AGG as those are the DM rules. This portfolio will be reviewed again at the end of May.
Tranche Momentum Recommendations: One alternative to the Dual Momentum strategy is know as the Tranche Momentum Model. The logic behind this model is to reduce the luck-of-review-day. When one runs a performance of the absolute and relative momentums or performances over specific periods, the recommendations will likely change from day to day. The following screen-shot is such an example. I added TIP and TLT to the original group of ETF.
The recommendation for tranche 1 (3/30/2016 data) is to invest 100% in BIV. That is similar to the above recommendation of investing 100% in AGG. Now move over to tranche 2 or the recommendation using data from 3/29/2016 and you will see TLT comes out on top. This is known as the luck-of-review-day as recommendations might change from day to day depending on the market action.
The Tranche Momentum Model is designed to minimize the luck-of-review-day and thereby reduce portfolio risk. In the following example, the portfolio would be spread between BIV and TLT.
Baker's Dozen Model Recommendations: The following model deviates from the basic Dual Momentum model in several ways. 1) The number of ETFs expands from the basic three to thirteen. 2) The look-back period moves from a 12-month look-back to a 60 and 100 trading days where 50% and 30% weights are respectively applied. Volatility occupies the remaining 20% performance allocation. Low volatile ETFs are highly valued. 3) The tranche model or tranche analysis is employed.
The Tranche Momentum Model recommendations for ETFs found in the Baker's Dozen are: TLT, GLD, TIP, PCY, BIV, and VNQ. I generally will round the purchases to the nearest 50 shares and for larger portfolios, to the nearest 100 shares. The recommended number of shares are found in the "Required" column.
There are a few additional metrics to pay attention to in the following screen-shot. Purchase only those securities that are priced above their 195-Day Exponential Moving Average. This requirement immediately eliminates VEA and DBC during this review. Also, pay attention to the "Golden Cross" (X/O column) and Absolute Acceleration percentage as we want both to be positive for ETFs. There is a high correlation between the higher ranked ETFs and the Absolute Acceleration percentages.
To gain a better understanding of the robustness of this model, check out this link. The review period for the Tranche Momentum Model is every 33-days as this helps the investor avoid the wash-sale rule, short-term trading fees on commission free ETFs, and the review is then spread out over different periods of the month.
Disclosure: I am/we are long TLT, BIV, GLD.
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.