Adaptive Asset Allocation and Dual Momentum Investing Using ETF’s

by | Oct 27, 2014 | Systematic Trading | 7 comments

Although I practice systematic trading based on strategies that generate short holding periods I keep an open mind towards other styles of trading.  One particular style of trading that has caught my attention recently is ETF momentum systems that require work on only one day per month. Using information from a paper written by Adam Butler, Michael Philbrick, Rodrigo Gordillo and David Varadi titled Adaptive Asset Allocation: A Primer plus rules from Gary Antonacci’s soon-to-be-released book, Dual Momentum Investing: An Innovative Strategy For Higher Returns With Lower Risk, I created my own ETF momentum strategy. The chart below is based on reallocating (if necessary) at the beginning of each month to five ETF’s based on the prior six month price performance of the ETF’s.

ETF MomentumMy model has a compound annual growth rate (CAGR) of 14.7% before fees and 89% of the twelve month periods have a positive return.

The caveat about this type of system is its partial reliance on bond prices increasing as interest rates fall which they have for the past thirty years. I believe this concern is warranted but Antonacci provides a means of taking falling bond prices into account.

If this type of investing is of interest to you I would encourage you to download the paper and order the book. Create your own model and, who knows, you may design a system that’s even better than mine. One parameter that you may want to vary is the look back period for prior price performance.  The common periods are 3 months, 6 months and 12 months.

FJP

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itay
itay
6 years ago

Hi,

Thank you very much for the links,
This looks very interesting.

Could you please give more details / clarification regarding this paragraph :

The caveat about this type of system is its partial reliance on bond prices increasing as interest rates fall which they have for the past thirty years. I believe this concern is warranted but Antonacci provides a means of taking falling bond prices into account.

Thanks,
Itay

itay
itay
6 years ago

Hi Fred,

Thank you very much for the explanation.

When I read about dual momentum I saw that when there is no etf with
A larger return then the risk free asset (SHY), it will be chosen instead.

I was wondering if you go to cash if even SHY has negative return and you
Answered it, so there might be some probability that some or even all the
the portfolio will not be invested in any etf, just cash.

Still, I am wondering if there can be any other kind of protection /insurance
From large drawdown / extreme bear regimes, since these types of investments
should protect the value of the portfolio before trying to make a good profit.

Maybe using some hedge ?

Thanks,
Itay

Fred
Fred
6 years ago

Hi Fred,
I have been a portfolio asset allocator for some time, diversification and like to benefit from negative correlation. I was introduced to Gary Antonacci Dual Momentum strategy. I found your internet site and really like your February performance rank. It would be nice to see your portfolio asset allocation each month based on momentum. Thanks for your innovative site.

Anasuya Bharadwaj
3 years ago

Great to see that you create own ETF.