Dual ETF Momentum Portfolio – September Update

In February I announced a new "Dual ETF Momentum" spreadsheet. The idea was inspired by a paper written by Gary Antonacci and available on Optimal Momentum.

The spreadsheet is available on Scott's Investment's here. The objective of the spreadsheet is to track four pairs of ETFs and provide an "Invested" signal for the ETF in each pair with the highest relative momentum.

Relative momentum is gauged by the 12 month total returns of each ETF. The 12 month total returns of each ETF is also compared to a short-term Treasury ETF (a "cash" filter) in the form of iShares Barclays 1-3 Treasury Bond ETF (SHY). In order to have an "Invested" signal the ETF with the highest relative strength must also have 12-month total returns greater than the 12-month total returns of SHY. This is the absolute momentum filter which is detailed in depth by Antonacci, and has historically helped increase risk-adjusted returns.

I have added an "average" return signal for each ETF on the spreadsheet. The concept is the same as the 12-month relative momentum. However, the "average" return signal uses the average of the past 3, 6, and 12 ("3/6/12″) month total returns for each ETF. The "invested" signal is based on the ETF with the highest relative momentum for the past 3, 6 and 12 months. The ETF with the highest average relative strength must also have an average 3/6/12 total returns greater than the 3/6/12 total returns of the cash ETF.

Using Portfolio123 I backtested a similar strategy using the same portfolios and combined momentum score used above. You can view the backtest results in June's update and I will also be posting new test results in the coming days.

Below are the four portfolios along with current signals:

Return data courtesy of Finviz
Equity	Representative ETF	Signal based on 1 year returns	Signal based on average returns
US Equities	VTI	Invested	Invested
International Equities	VEU
Cash	SHY
Credit Risk	Representative ETF	Signal based on 1 year returns	Signal based on average returns
High Yield Bond	HYG	Invested	Invested
Interm Credit Bond	CIU
Cash	SHY
Real-Estate Risk	Representative ETF	Signal based on 1 year returns	Signal based on average returns
Equity REIT	VNQ	Invested
Mortgage REIT	REM
Cash	SHY		Invested
Economic Stress	Representative ETF	Signal based on 1 year returns	Signal based on average returns
Gold	GLD
Long-term Treasuries	TLT
Cash	SHY	Invested	Invested

US equities are leading international equities, high yield bonds lead credit bonds, and cash leads gold and long-term treasuries. Equity REITs lead mortgage REITs and cash based on 1 year returns, while cash leads both equity and mortgage REITs based on the average of 3/6/12 month returns.  This is the same result as last month.

As an added bonus, the spreadsheet also has four additional sheets using a dual momentum strategy with broker specific commission-free ETFs for TD Ameritrade, Charles Schwab, Fidelity, and Vanguard. It is important to note that each broker may have additional trade restrictions and the terms of their commission-free ETFs could change in the future

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