Here are some of best the articles I read this month:
If you haven’t listened to Barry Ritholtz interview Charlie Ellis in his Masters in Business podcast then I highly recommend that you download it.
“The great strategy you can’t stick with is obviously vastly inferior to the very good strategy you can stick with.” Cliff Asness
For my Pure Momentum strategy, it was a case of what went up in January came down in February. The 5.5% gain in January was followed by a 4.2% decline in February. US treasuries provided the gain and the subsequent fall.
I gauge the performance of my ETF momentum trading system in a number of ways. First I compare it to a passive global ETF strategy.
The passive global portfolio is constructed with ETF’s based on weights as per the table below.
The basis for the composition of my global portfolio is a research paper written by Ronald Doeswijk and others as discussed at Gestaltu.
My trading system has performed much better than the passive global portfolio so I like to ensure that ETF selection bias is not at play. That is, my system may have outperformed simply because it includes ETF’s that are performing well overall. To check against selection bias and to get a sense of the value that my momentum strategy is adding, I compare the performance of Pure Momentum to the average of the ETF’s in the basket that I select from.
Had I invested $100,000 equally in the ETF’s that I select from I would have a gain of $553 versus the $4,295 gain that my momentum strategy generated. Four months is a meaningless time period to perform an evaluation over but I like what I see here.
Finally, I compare my performance against a professionally run fund that employs a similar momentum strategy applied to asset classes. Cambria Global Momentum ETF has a strategy that is very similar to the one behind Pure Momentum.
I am pleased with the performance of my ETF momentum strategy so far and am very comfortable with the logic behind it. You can always check on the performance of Pure Momentum by going here.
The 2015 edition of the Credit Suisse Global Investment Returns Yearbook is now available here. Trust me, this is a publication you definitely want to download. If you have any concerns about the persistance of momentum over the course of history, turn to page 12 and look at Figure 8 which covers the 1900-2014 period. My way of investing by using the momentum factor has a very solid record as you will see.
If you follow the markets, you know that US treasuries were strong performers in 2014 but have taken a hit so far this month. You also know that US stocks have continued to performed very well, beating almost everyone’s expectations. If you are wondering how some of the major asset classes rank by momentum today, I can help.
One of the common methods of ranking asset classes is performed by comparing the average of the trailing 3-month, 6-month, 9-month and 12-month returns. That is the method I used to rank the asset classes in the following chart.
Despite the 5.1% decline in long term US treasury ETFs last week, this asset class is still the highest ranked in terms of momentum.