Dual Momentum: The Basics
There are a few simple rules that guide Dual Momentum managers. Dual includes Absolute Momentum and Relative Momentum. Here are the basic rules for those who would choose to manage their portfolio using this model.
- Select three ETFs to provide global equities coverage. The most basic are the following.
- VTI for U.S. Equities, VEU for International Equities, and BIV for bonds.
- Use a cutoff ETF such as SHY as it is a low volatile security.
- Every month rank VTI and VEU with respect to SHY. This is the absolute momentum part of the equation. Invest 100% in the ETF (either VTI or VEU) that ranks highest when a one-year or 252 trading days look-back performance period is used for the rankings. Selecting the highest ranking ETF is the relative momentum part of the equation.
- If neither VTI or VEU is outperforming SHY, invest 100% of the portfolio in bonds (BIV). Some managers prefer to use BND or AGG as the bond representative.
Dual Momentum Tweaks
And now for a few tweaks to the basic Dual Momentum model.
- If either VTI or VEU is priced below its respective 195-Day Exponential Moving Average, do not invest even if the ETF is outperforming SHY. Move on to the bond ETF.
- If all three ETFs (VTI, VEU, and BIV) are priced below their respective 195-Day EMAs, move 100% of the portfolio to cash.
- Review the portfolio every 33 calendar days instead of every month. This is done to avoid the wash-sale rule and commission free short-term trading fees. Another advantage is that the review period is rotated throughout the month.
All of the above rules are easily accomplished within the latest version of the Kipling Tranche 2.5.2 spreadsheet.