Momentum Investing: Instrument selection is critical

Money management and following a proven market anomaly are also critical.  But the subject of this post is instrument selection.

The Fama-French data shows annualized return from 1926-2000 was:

Small Value Stocks 14.9%
Large Value Stocks 12.9%
Large Growth Stocks 10.8%
Small Growth Stocks 9.9%

Vanguard offers VISVX or VBR to participate in small value outperformance.

More recently, in the previous two bullish periods, 2003 to 2007 and 2009 to 2013:

  2003-2007   2009-2013
  CAR% Sharpe Max DD   CAR% Sharpe Max DD
SPY 14 2.0 7   25 2.0 16
VISVX 17 2.6 7   38 2.3 14
FLSTX 23 2.8 10   40 2.1 21
Low-beta 17 2.3 7   20 3.0 8
XIV 93 35   82 2.3 28
TNA         126 2.5 39

Notice how small value performs well and could possibly be used as an all-weather instrument choice for the intermediate term strategies discussed on this blog.  One risk of selecting sector ETFs is their narrowness and therefore possibility of under-performance in a specific market period.  One could make a case that bargain hunters buy value in a declining market, providing some support (this may drive the performance Fama-French found).

More on XIV in the next post: higher risk and higher reward with an inbuilt structural advantage 80% of the time.  A portion of equity could be allocated to XIV to boost returns, with the balance in low-beta (for example).

A weekly 2 year correlation table is shown below.  Notice in the second column how closely small value (VISVX) has tracked FLSTX which is one of the highest performing unleveraged funds.

Correlation FLSTX SPY VISVX XIV TNA BETA-LOW-US
FLSTX 1 0.897 0.982 0.899 0.772 0.792
FDXAX 0.984 0.932 0.994 0.835 0.726 0.82
VISVX 0.982 0.945 1 0.834 0.703 0.846
FEIRX 0.946 0.985 0.97 0.823 0.559 0.921
xiv 0.899 0.733 0.834 1 0.771 0.71
spy 0.897 1 0.945 0.733 0.462 0.938
FATEX 0.86 0.818 0.862 0.708 0.735 0.656
IYR 0.847 0.965 0.898 0.719 0.401 0.967
IYE 0.833 0.664 0.818 0.714 0.85 0.489
Beta-Low-US 0.791 0.937 0.845 0.705 0.315 1
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
                                 
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4 thoughts on “Momentum Investing: Instrument selection is critical

  1. Pingback: XIV! | RRSP Strategy

  2. Pingback: Daily Wrap for 5/12/2013 | The Whole Street

  3. Pingback: Recession models: walk forward testing | RRSP Strategy

  4. Pingback: Market turning points | RRSP Strategy

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