Tag Archives: seeking

Current Recommendations For Dual Momentum Portfolio

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.

October 2015 U.S. Fund Flows Summary

By Tom Roseen For the first month in three investors were net purchasers of fund assets, injecting $44.8 billion (the largest net inflows since August 2014) into the conventional funds business (excluding ETFs) for October. However, for the fourth consecutive month stock & mixed-asset funds suffered net redemptions, handing back some $5.7 billion for October, while for the first month in five fund investors were net purchasers of fixed income funds, adding $4.3 billion to the macro-group for October. And for the fifth month in six, money market funds witnessed net inflows, taking in $46.3 billion. Despite a weaker-than-expected jobs report at the beginning of October, mixed economic data throughout the month, and a roller-coaster ride of corporate earnings reports, volatility remained below the long-term average of 20. Investors appeared to shrug off a disappointing nonfarm payrolls report that showed the U.S. had added a lower-than-expected 142,000 jobs for September as some investors began to believe the Federal Open Market Committee would not raise interest rates this year. A surprise cut in interest rates by the Peoples Bank of China (PBOC), better-than expected earnings reports from a few heavyweight tech firms, and hints from the European Central Bank (ECB) that further easing might be in the cards pushed stocks to a fourth consecutive week of plus-side performance and sent some investors into risker assets for the month, while others were content to pad the coffers of money market funds in a wait-and-see approach to investing. The Mixed-Asset Funds macro-classification (+$3.4 billion) attracted the strongest net inflows of Lipper’s five equity macro-classifications, while USDE funds experienced the largest outflows (-$8.5 billion). Large-cap funds (-$5.3 billion) suffered the largest monthly net redemptions of the capitalization groupings for the third consecutive month. In contrast, the ETF universe witnessed its ninth consecutive month of net inflows, taking in $28.3 billion for October (its largest net inflows since February 2015). For the second month in a row authorized participants (APs) were net purchasers of equity ETFs-injecting $16.3 billion, and for the fourth month in a row they were net purchasers of bond ETFs-injecting $12.0 billion for October (their largest net inflows since February). In response to the easy-money news from the PBOC and ECB, for the first month in four APs’ appetite for World Equity ETFs topped that for all other types of equity ETFs. The macro-classification witnessed the strongest net inflows (+$6.4 billion) of Lipper’s five equity-related macro-classifications, followed by Sector Equity ETFs (+$5.9 billion), USDE ETFs (+$4.0 billion), and Alternatives ETFs (+$0.1 billion). The Mixed-Asset ETFs macro-classification (-$0.1 billion) suffered the only net outflows for the month. If you’d like to read the entire October 2015 FundFlows Insight Report with all its tables and charts, please click here .

Investing Opportunities As Central Banks Diverge

Stocks rallied last week as investors looked past the tragic attacks in Paris and once again focused on central bank policy. In particular, investors celebrated the potential for more central bank divergence: tightening by the Federal Reserve (Fed), while the European Central Bank (ECB) pursues easing. In the U.S., investors now appear to be treating a December Fed rate hike as a sign of economic stability rather than as something to be feared. As such, investors were cheered last week by the October Fed meeting minutes , which implied that the central bank views the economy as strong enough to justify an initial rate hike, most likely in December. Meanwhile, European stocks continued to rally on hopes of more monetary stimulus, rather than signs of economic recovery. Investors got what they were looking for last week, with several ECB officials confirming the likelihood that the central bank will expand its quantitative easing (QE) program. As I wrote in my latest weekly commentary ” Cheering, Not Fearing, a Rate Hike? “, as these central banks diverge, there are several implications for investor positioning. Consider overweighting hedged European equities. A falling euro and an ECB likely to expand its monetary stimulus are both catalysts for Europ ean stocks . The one caveat: Given that further gains are partly predicated on a weaker currency, dollar-based investors should continue to consider currency-hedged vehicles . In the U.S., consider adopting a modest tilt toward large- and mega-cap stocks. At first blush, my preference for U.S. large-cap stocks seems counterintuitive, given expectations for a stronger dollar. Generally, a strong dollar is seen as more of a headwind for large caps, which have a greater exposure to international sales. However, this year has demonstrated how the relationship is more complex. Yes, a stronger dollar has proved a headwind for large-cap company earnings, but small caps have actually been underperforming, according to Bloomberg data. Part of the reason has to do with why the dollar is appreciating: rising real (after-inflation) interest rates. As data accessible via Bloomberg show, U.S. real 10-year rates are up roughly 60 basis points (0.6 percent) since the end of January. This, in turn, is having an impact on small-cap valuations, based on Bloomberg data. Through October, S&P 500 Index multiples actually rose a bit. However, the price-to-earnings ratio on the Russell 2000 Index of small-cap stocks contracted by around 2.5 percent. It should be noted that this is consistent with history. Looking forward, to the extent we see a gradual rise in real rates, higher real rates are likely to keep small-cap valuations under pressure. Finally, according to Bloomberg data, large- and mega-cap names also have the advantage of cheaper valuations relative to the broader market. This post originally appeared on the BlackRock Blog.