Re-balance Cycle Reminder All MyPlanIQ’s newsletters are archived here.

For regular SAA and TAA portfolios, the next re-balance will be on Monday, May 7, 2017. You can also find the re-balance calendar for 2017 on ‘Dashboard‘ page once you log in.

As a reminder to expert users: advanced portfolios are still re-balanced based on their original re-balance schedules and they are not the same as those used in Strategic and Tactical Asset Allocation (SAA and TAA) portfolios of a plan.

Please note that we now list the next re-balance date on every portfolio page.

Momentum Investing Review

We periodically looked at the performance of momentum investing strategies at various levels. Last time, we looked at this in June 12, 2017: A Mixed Bag Performance of Momentum Investing. In this newsletter, let’s review how these portfolios/funds have recently fared. 

Again, here is the taxonomy of momentum based investing strategies:  

  • m1: A group of individual stocks such as Dow Jones 30 or Nasdaq 100 etc. — Can be Effective, but volatile. 
  • m2: A group of industrial stock funds such as Fidelity’s famous Fidelity Select funds. – Can be Effective, but volatile. 
  • m3: A group of stock sector funds such as SPDR’s S&P sector ETFs such as SPDR Select Energy (XLE) etc. – Can be Effective, but volatile. 
  • m4: A group of stock style funds such as Russell large, mid and small cap stock ETFs. – Effective and comparable risk. 
  • m5: single stock index (fund) buy/sell decision. – Fickle though might be on par with buy and hold. 
  • m6: A group of diversified and somewhat uncorrelated asset classes such as stocks, bonds, real estates (REITs) and their minor asset classes such as long term bonds, international bonds, gold etc. – Effective and lower risk.

Furthermore, at MyPlanIQ, we always advocate the momentum driven strategy at asset allocation level, or m6 in the above categories. This is what our  Tactical Asset Allocation(TAA) strategy is based on.

Momentum stocks continue to do well

It turns out that until recently, stock level momentum investing has paid off (as of 4/27/2018):

Ticker/Portfolio Name YTD
1Yr AR 3Yr AR 5Yr AR 10Yr AR
PIE (PowerShares DWA Emerging Markets Mom ETF) 1.2% 26.4% 3.8% 1.2% 0.1%
EEM (iShares MSCI Emerging Markets) 0.3% 20.5% 4.5% 4.5% 1.7%
AMOMX (AQR Momentum L) 3.7% 18.3% 9.7% 12.8%  
PDP (PowerShares DWA Momentum ETF) 2.9% 16.3% 6.9% 11.5% 7.6%
MTUM (iShares MSCI USA Momentum Factor) 4.0% 27.8% 16.1% 17.1%  
SPY (SPDR S&P 500 ETF) 0.7% 14.3% 10.5% 13.3% 9.0%
AIMOX (AQR International Momentum L) 2.8% 17.9% 4.5% 4.3%  
EFA (iShares MSCI EAFE) 0.9% 14.1% 4.7% 5.8% 2.4%
ASMOX (AQR Small Cap Momentum L) 2.8% 14.9% 8.1% 11.6%  
IWM (iShares Russell 2000) 1.5% 10.9% 9.0% 12.2% 9.5%

**YTD: Year to Date (not annualized)

More detailed year by year comparison >> 

For the past one year, all of the momentum stock strategies have done better than their benhcmark indexes. Unfortunately, other than MTUM, they have all underperformed for 3, 5 and 10 years. 

MTUM (iShares MSCI USA Momentum Factor) stands out as it has done better than SPY for the last 1, 3, and 5 years by some big margins. 

Several important characteristics for this ETF: 

  • Low fee: 0.15% vs. PDP’s 0.63% or AMOMX’s 0.5% (AMONX’s 0.65%)
  • It invests in both large and mid cap stocks
  • Its momentum score formula combines both 6 and 12 month returns and then scaled by the volatility of the past 3 years. So it’s a risk adjusted momentum score, similar to the one used in MyPlanIQ Strategic Asset Allocation fund selection. 

Based on iShares, the index has performed very well: 

MTUM is one of the best momentum ETFs with reasonable fees. We will continue to monitor this fund’s future performance. It’s one of the factor style funds that we are considering to add to some of our investment plans. 

Momentum strategies at higher levels are doing well too

For the past 12 months, momentum strategies have also done well at higher levels: 

Portfolio Performance Comparison (as of 4/27/2018):
Ticker/Portfolio Name 1Yr AR 3Yr AR 5Yr AR 10Yr AR 10Yr Sharpe
(m2)P Sector Rotation Fidelity Select Funds Top 2 Monthly Adjust with Cash 14.9% 12.3% 15.9% 11.2% 0.5
(m3)P Momentum Scoring Sector ETFs 15.1% 6.6% 7.8% 7.2% 0.43
(m4)P Momentum Scoring Style ETFs and Treasuries 9.6% 4.4% 8.6% 9.0% 0.58
(m5)P SMA 200d VFINX Total Return Bond As Cash Monthly 13.8% 8.9% 12.3% 13.3% 1.04
(m6)P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds 14.2% 6.2% 8.0% 8.8% 0.75
(m1()AMOMX (AQR Momentum L) 18.3% 9.7% 12.8%    
VFINX (Vanguard 500 Index Investor) 13.8% 10.3% 13.2% 8.9% 0.43

Detailed comparison >>

In general, the lower level momentum strategies are doing better than higher level ones. However,  P Momentum Scoring Style ETFs and Treasuries got a hit last year and it’s the only one that underperformed VFINX in the past one year. 

One possible explanation for the lower level strategies have done well is that the past stock index performance has been largely driven by few stocks that have done very well. These stocks are mostly technology stocks such as FANG (Facebook, Amazon, Netflix, Google) plus a few others such as Microsoft and Apple. Markets are so much tilted to these stocks so stock level momentum can benefit directly while other level strategies (such as style rotation) benefit less as they tend to choose two or more funds to invest. For example, the style rotation portfolio P Momentum Scoring Style ETFs and Treasuries might invest in both large cap and small cap growth ETFs at a time, its returns might be distracted by the small cap growth ETF (which does not have these FANG type of stocks). 

We need to point out that because of the outstanding returns for US stocks (represented by S&P 500 index like VFINX) in this bull market since 2009, the multi-asset strategy such as P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds has not shown many advantages for as many as past 10 years. Furthermore, the single index momentum strategy using 200 days simple moving average (P SMA 200d VFINX Total Return Bond As Cash Monthly) has done the best, beating both benchmark VFINX and the multi-asset tactical one. 

However, if we extend our horizon to 15 years and since 2001 (when P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds back test started), we can see that it still outperforms VFINX by both returns and risk (maximum drawdown): 


Maximum Drawdown

since 1/1/2001


since 1/1/2001

P Goldman Sachs Global Tactical Include Emerging Market Diversified Bonds 17.2% 12.8% 12.7% 8.8%
VFINX (Vanguard (S&P 500) Index) 55.3% 6.3% 9.5% 8.9%
VBINX (Vanguard Balance (60% stocks/40% bonds) 36% 6.2% 7.8% 7.2%
AR: Annualized Return

Apparently, it’s hard to imagine the red-hot VFINX can underperform the portfolio in the above table by some big margin (for example, 12.7% vs. 9.5% in the 15-year timeframe) considering VFINX has done better for the past 1, 3 and 5 years. But as the current bull market is over stretched and over extended, we believe the outperformance will tide will soon to turn and the long term outperformance of such a tactical strategy will continue. 

Market Overview

Factset’s latest S&P 500 earnings report continues to paint a rosy picture: as of last Friday, 53% of the companies in the S&P 500 had reported actual results for Q1 2018. The blended earnings growth is 23.2%, much higher than the expected 17.3% on December 31, 2017. However, stock returns have languished. In fact, year to date, roughly S&P 500 has return negatively. One of the explanations is so called peak earning theory: meaning business profits have reached the peak and from now on, growth will slow down. Though we are skeptical on this at the moment: Factset states that so far earnings guidance has been very positive for the next quarter, nevertheless, it’s an established fact that the gross profit margin of S&P 500 companies has reached a historically high level that’s hard to sustain for a long time. Regardless, we admit we have no any positive idea on the near term stock direction and the best way is to stick to the investment strategies of our choice and manage risk to a comfortable level.

For more detailed asset trend scores, please refer to 360° Market Overview

Now that the Trump administration has been in the office for more than a year, the economy and financial markets are in general still in a good shape. Whether the economy will continue to benefit from the supposedly trickle down of the tax cut, the deregulation, and the promised infrastructure spending remains to be seen.  On the other hand, stocks continued to ascend, regardless of the progress. Looking ahead, however, we remain convinced that markets will experience more volatilities at some point when reality finally sets in. 

In terms of investments, U.S. stock valuation is at a historically high level. It is thus not a good time to take excessive risk. However, we remain optimistic about U.S. economy in the long term and believe much better investment opportunities will arise in the future. 

We again would like to stress for any new investor and new money, the best way to step into this kind of markets is through dollar cost average (DCA), i.e. invest and/or follow a model portfolio in several phases (such as 2 or 3 months) instead of the whole sum at one shot. 

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