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How to construct a dual momentum portfolio using a few simple rules. Applying absolute and relative momentum to build a portfolio. Current recommendation is to invest 100% of the portfolio in U.S. Equites. Gary Antonacci’s popular book, Dual Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk is used as a template for the following analysis. The primary deviation from Antonacci’s logic is the choice of securities used to populate the portfolio. To hold down trading costs, the following commission free ETFs from TDAmeritrade are used. They are: VTI – Vanguard Total Stock Market ETF VEU – Vanguard FTSE All-World ex-US ETF BIV – Vanguard Intermediate – Term Bond ETF SHY – iShares 1-3 Year Treasury Bond SHY is not used as a potential investment, but rather serves as a cutoff or “circuit breaker” ETF. The dual momentum rules are quite simple as they make use of absolute and relative momentum principles. Absolute momentum is where the investor examines the performance of the security with respect to its own past. Relative momentum is where the investor compares the trend or past performance with respect to other securities. Dual momentum makes use of both concepts. Antonacci recommends a look-back period of one year or 252 trading days with a monthly review. Think of this as one of those monthly reviews. With the ETFs selected for possible purchase, the cutoff ETF ((NYSEARCA: SHY ))) identified, and the look-back period settled, here are the few rules for portfolio management. This is a simplification of the diagram shown on page 101 of the dual momentum text. Rank VTI and VEU with respect to SHY. If both VTI and VEU rank above SHY, invest 100% of the portfolio in the highest ranked ETF. VTI is that ETF in this review. If neither VTI or VEU rank above SHY, invest 100% in the bond ETF, BIV. Other options for bonds are AGG or BND. I selected BIV for this example as I expect interest rates will rise so I am reluctant to use long-term bond ETFs. Wait a month for the next review. Current Recommendations: Based on 11/23/2015 data and a look-back period of 252 trading days, the highest ranking ETF on an absolute scale is VTI. Since it is ranked higher than VEU and is performing above SHY, we invest 100% of the portfolio in VTI. Had VEU ranked above VTI and SHY, 100% would have been invested in VEU. If neither VTI or VEU ranked above SHY, 100% of the portfolio would go to BIV. (click to enlarge) The above worksheet is designed for a more complex portfolio, but still works for a dual momentum portfolio with very minor adjustments. Scalper1 News
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