I was busy this weekend developing new ETF momentum models and improving the optimal momentum model. The optimal momentum model is now called the “Low Correlation model”.
The following ETF rotation strategy signals will now be available to all subscription offerings.
These ETF models use recent momentum and volatility to choose the best ETF for the month. There has been so much research showing that momentum works, academics no longer doubt its value. Here are some momentum based research papers as examples:
Momentum investment strategies, portfolio performance, and herding: A study of mutual fund behavior.
A unified theory of underreaction, momentum trading and overreaction in asset markets.
International Momentum Strategies.
Profitability of Momentum Strategies: An Evaluation of Alternative Explanations.
The International ETF momentum strategy invests in one country ETF each month. Since 2003 this strategy has an average annualized return of 24.4% with a maximum peak to trough drawdown of -14.2%.
The Style ETF momentum strategy invests in one Style ETF each month. Since 2003 this strategy has an average annualized return of 15.6% with a maximum peak to trough drawdown of -10.8%. This model rotates between large cap growth, large cap value, midcap growth, midcap value, small cap growth, small cap value, micro cap. This model could be useful for 401k investors to select which style mutual fund to select from a limited plan.
The Sector ETF momentum strategy invests in one Sector ETF each month. Since 2003 this strategy has an average annualized return of 24.4% with a maximum peak to trough drawdown of -23.5%.
The Non correlated ETF momentum strategy invests in two ETF’s each month out of a basket of low correlation ETF’s. Since 2003 this strategy has an average annualized return of 37.8% with a maximum peak to trough drawdown of -13.1%.
Below is a hypothetical equity curve of the growth of $100 if invested in these momentum m0dels.
To see the monthly returns Click here.
Using the ETF models for more than just buying ETF’s:
Stock investors can use the “Style” and “Sector” models as a guide for stock selection.
For example if the “Style” ETF model is long small cap growth and the “Sector” ETF model is long the technology ETF, a stock buyer may want to concentrate research efforts in small cap technology stocks, or better yet cherry pick from our quantitative stock screens for small cap technology.
401k investors that are restricted to a small group of mutual funds to choose from can use the “Style” model and make mutual fund allocations that match the model or buy a bond mutual fund if the “Low correlation” model is long the bond ETF.
