“It is better to ride a horse in the direction it is already going.”
Much is made of the Dual Momentum investing model, particularly since the launch of Gary Antonacci’s book by the same name. Dual implies combining two momentum approaches into one investing model and that is exactly what Antonacci does. The two momentum styles are:
- Absolute Momentum – Absolute momentum is defined by Antonacci as an asset’s return less the return of a “risk free” investment such as a U.S. 90-day treasury bill. Here at ITA we modify the definition of absolute momentum in that we use a 1-3 year treasury bond (SHY) as the cutoff security. In other words, an ETF performing above SHY is considered as a candidate for purchase. If the security ranks below SHY, it is culled from the portfolio.
- Relative Momentum – Relative momentum is defined as the return of a security with respect to other securities. Antonacci ranks securities based on their returns over the past 12 months. Higher ranked securities carry a higher relative momentum.
Both absolute and relative momentum principles are built into the Kipling Tranche 2.5.1 spreadsheet. ETFs ranked above SHY are deemed to have positive absolute momentum. If ETF ABC is ranked above DEF, it has a positive relative momentum. It is possible for an ETF to have a positive relative momentum with respect to another ETF, yet have a negative absolute momentum. Regardless how well an ETF is performing with respect to another ETF, if it is under-performing SHY (or another low volatility reference such as BIL) it has a negative absolute momentum and is therefore not a candidate to hold or purchase.
Antonacci, in his Dual Momentum book, uses three asset classes in what he calls his Global Equities Momentum (GEM) model. The asset classes are; U.S. Equities (VTI), International Equities (VEA), and an aggregate bond security (AGG or BND). I’ve provided example ETFs for each asset class. Antonacci uses other securities, but I prefer to stick with commission free ETFs, available through TDAmeritrade.
Antonacci sets up monthly reviews with a 12-month look back period. Each month he runs performance tests to see which of the three ETFs ranks highest based on the performance over the last 12 months. One hundred (100%) percent of the portfolio is invested in that single ETF and remains invested until the next monthly review. While investing in a single ETF appears to lack diversification, remember that we are investing in hundreds of individual companies through ETFs.
Here at ITA our ranking system is not based on 12-month returns, but instead uses three metrics.
- A 50% weight is assigned to the performance over the past 60 trading days.
- A 30% weight is allocated to the performance over the past 100 trading days.
- A third metric, volatility, is appropriated a 20% weight and we reward low volatile ETFs.
Portfolios are reviewed every 33 days instead of every month. The 33-day review period avoids the wash sale rule, spreads the review throughout the month, and eliminates the short-term trading fees if one is using commission free ETFs with TDAmeritrade.
Employing an absolute momentum model reduces portfolio volatility and major draw-downs. In addition, it helps to improve the Sharpe and Sortino ratios. Relative momentum is designed to keep us invested in the top performing ETFs.