We saw in our earlier posts on Global Equities Momentum (Part I, Part II) that by swapping the momentum equivalent of the equity indices in the GEM decision tree, one could significantly boost returns. Also, momentum trumped value.
Correlation between momentum and base indices
In the original GEM dual momentum model, the S&P 500 index was used to decide and to trade. What we claim here is that we can continue to use the S&P 500 index to decide, but we will use the momentum equivalents to trade. To back our claim, we present the correlation in the monthly returns of the base/momentum index pairs:
The indices move pretty much in tandem.
Robustness
If dual momentum is robust, then our strategy piggybacks on its robustness through the decision tree. Where we differ is in the way we express the trade. And our backtest shows that GEM is superior to buying and holding the underlying indices themselves both in terms of returns and drawdowns:
Annual returns:
Instruments
Implementing this strategy is fairly straightforward. You need to track the following ETFs:
- SPY: for S&P 500
- BIL: for US T-bills
- IDEV: World ex-US
- MTUM: US Momentum
- IMTM: World ex-US Momentum
- AGG: Aggregated bond
You will be long one of the last three ETFs above at any given point in time:
We will setup a virtual portfolio for this strategy and post the link here when it is up and running.
Code and more charts on github.
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