The strategy begins with a globally diversified basket of ETFs and initially screens for the top six performers based on momentum. The strategy then uses what’s called “dual momentum”, meaning assets must exhibit both positive momentum (this is essentially trend-following) and strong momentum relative to its peers (aka “relative” or “cross-sectional” momentum), to screen the six ETFs from step 1. Finally, the strategy applies a volatility screen and ranks on the basis of a risk-adjusted score. The top three ETFs are selected and held for one month.
The model is rebalanced on the last day of every month.
The model universe includes:
S&P 500 (represented by SPY), Nasdaq 100 (QQQ), US real estate (VNQ), US mortgage real estate (REM), intermediate-term US Treasuries (IEF), long-term US Treasuries (TLT), US TIPS (TIP), Europe stocks (VGK), Japan stocks (EWJ), international small cap stocks (SCZ), emerging market stocks (EEM), international real estate (RWX), international treasuries (BWX), commodities (DBC) and gold (GLD).
Sharpe Ratio – the average return earned in excess of the risk-free rate. A higher Sharpe Ratio is better
Risk-Free Rate – represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time.
Sortino Ratio – another measure of risk that takes into account the downside deviation of the asset. A higher Sortino Ratio is better.
What is drawdown?
Drawdown is the measure from the highest high to the lowest low or peak to trough during a specific time period. It is an important measurement of risk. A larger drawdown requires a more significant increase in the security to recover.