Seeking Alpha

Prospecting Dual Momentum With GEM

Includes: BND, IVV, SPY, VEU
by: TrendXplorer

Gary Antonacci popularized dual momentum with an effective and simple approach for dynamic asset allocation: Global Equities Momentum (GEM).

Using simulated ETF data series, GEM’s performance over past market conditions can be approximated.

For longer investment horizons GEM’s implementation with ETFs obtained positive returns with high consistency.

After winning first place in 2012 in the NAAIM Wagner competition, Gary Antonacci popularized his momentum investing approach in the award winning book "Dual Momentum Investing."

Dual Momentum Investing book cover

In his book, Antonacci makes a strong case for combining relative strength price momentum with trend following absolute momentum. The first 90 pages are a comprehensive overview, introducing the "premier market anomaly," describing the history of momentum research and its early practitioners, behavioristics and lots of other interesting themes. Frankly, these pages alone make the book a must read, not least due to the conversational, at times even playful tone of Antonacci's light pen.

At the center of the book lies the chapter covering Global Equities Momentum (GEM), where Antonacci explains the mechanics of the dual momentum approach for dynamic asset allocation. GEM is quite brilliant in its simplicity: a 12-month lookback for both absolute and relative momentum combined with just three asset classes, are all of GEM's components.

Both in his book and on his website, Antonacci presents the Global Equities Momentum approach with non-tradable total return index data. Going back as far as the seventies has the benefit of incorporating a rising yields decade too. Therefore, to get insight into GEM's long-term performance with today's ETFs, index based simulated total return proxies are required.

By applying GEM's dynamic asset allocation to such simulated ETFs, the practitioner may get a good impression (nothing more) of GEM's "real" performance during past market conditions. Before doing so, first GEM's performance with index data will be replicated to validate the accuracy of the presentation in this contribution.

Noteworthy, the rules often shared for GEM, derived from the flow chart on page 101, are not the official GEM rules. Actually, the flow chart along with the corresponding instructions on page 112 is only a simplified way to determine GEM's allocations for those using a website like PerfCharts to get their signals. However, when doing calculations with a charting program like AmiBroker, the instructions on page 98 are to be adhered instead.

In contrast to common practice, GEM's official rules administer absolute momentum before the application of relative strength momentum. According to recently confirmed academic research, the U.S. stock market tends to lead the rest of the world especially during recessions, hence the trend of stocks is determined first using just the S&P 500 index. Only when an uptrend in the S&P 500 is identified by comparing its 12-month total return against that of the 3-month U.S. T-Bill, relative strength momentum is applied to select the best performing stock index for allocation: The S&P 500 index or the All Countries World Index ex U.S.

Otherwise the U.S. Aggregate Bond index is selected for capital preservation. For more about GEM's mechanics and the strong case Antonacci builds for dual momentum investing see his highly recommended book and the FAQ on his website.

In the following chart, both the official version (INDEX98 in black) and the simplified version (INDEX101 in gray) are painted along with GEM's three index components. The upper subpane shows the monthly allocations according to GEM's official rules. The lower subpane has the allocations following the simplified logic.

NB! Results are derived from non-tradable monthly total return indexes and are therefore purely hypothetical.

Close inspection of the two allocation panes reveals how the official set of rules has GEM switching to bonds earlier than the simplified approach, but comes along with slightly more whipsaw too. The earlier switch to risk-off results in higher absolute return as well as better risk-adjusted performance as shown in the statistics table. For the remainder of this contribution, the official GEM logic is observed.

Validating the monthly selections against GEM's published allocations gives a match for all but 3 out of 540 months (1971-2015). The 3 observed differences are due to the application of the 30-day T-Bill total return series instead of the 3-month T-Bill.

Now let's apply GEM to the markets with today's ETFs: IVV, BND and VEU (per Antonacci's FAQ). For the following simulation, the data histories are back extended with the underlying total return index and corrected for the observed tracking error between the ETF and the underlying total return index.

The next chart shows the simulated ETF performance for GEM (black) with BIL as risk free proxy against the index performance (dashed) and the 3 ETFs eligible for allocation. Again, the subpane has the monthly allocations confirming the low turnover of the approach, while also showing the inevitable periods with some whipsaw.

NB! Results are derived from simulated monthly total return data based on indices corrected for tracking errors. Furthermore, trading costs, slippage and taxes are disregarded. Results are therefore purely hypothetical.

As the charts show, the ETF implementation tracks a near perfect footprint. Remarkably, the risk-adjusted performance of the ETF implementation even exceeds that of the original index version as shown in the statistics table. Notable is the 3-year positive win rate of more than 99%.

Due to GEM's drawdown profile as charted below for the ETF implementation, the investor needs to have a longer investment horizon for being able to recover. Point to note: For a lot of sensible investors, a drawdown close to 20% is a deal breaker because a netted 25% recovery is required only to get back to break-even again. However, in the longer run, GEM proves to be quite resilient as the chart ahead will show.

For the long-term investor, GEM's tendency to recover is shown on the following chart. The chart depicts the rolling 3-year return for GEM (red) and SPY (blue). In contrast to SPY's prolonged sub-zero periods, notice GEM hardly ever dips down the 0% water mark. This is indicative for GEM's high consistency in registering positive returns on investment for nearly all 3-year periods during 1974-2015.

The dual momentum approach identifies the overall market direction - are stocks globally expected to go up or down? - by putting U.S. stocks to the absolute momentum test. To pass the absolute momentum threshold, U.S. stocks in the ETF approach represented by SPY, need to outperform an (assumed) risk free investment like in a 30-day or 3-month U.S. T-Bills. The following chart compares GEM's application with 4 different absolute momentum proxies: BIL (blue), SHV (magenta), SHY (green) and a 0% cash holding (red). The original (non-tradable) index performance is again added for reference (dashed black). For "live" application BIL or SHV appear to be the best choices, confirming Antonacci's FAQ.

NB! Results are derived from simulated monthly total return data based on indices corrected for tracking errors. Furthermore trading costs, slippage and taxes are disregarded. Results are therefore purely hypothetical.


  • Different from the book, the statistics tables show CAGR readings and conservatively CAGR-based Sharpe ratios.
  • The author has no affiliation with Gary Antonacci or AmiBroker and receives no compensation from anyone of them.
  • This contribution is simultaneously published on TrendXplorer's blog.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in IVV, VEU, BND over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.