Playing with momentum

[MustacheAndaHalf]

I'm trying an experiment with a tiny fraction of my portfolio, where I see what it's like to apply momentum algorithms to a sort of tax-managed mini-fund.

Here's the criteria I imposed on this experiment:
* momentum involves lots of buying and selling, so I need to limit the costs involved with trades
* insignificant compared to my portfolio (under 1%)
* benchmark against S&P 500
* limit the tax impact

So what I decided on is sector rotation using Vanguard funds.  That way I'm covering the market (roughly), trades are $0, and expense ratio of the holdings are also low.  I allocate 20% gains over the year, and will skip buy/sell until this "tax gain budget" has enough room.  I'll start posting results and observations later in this thread.

Important caveat: this experiment will prove nothing.  Meaningful data would require years, and I don't plan to run it that long.  The best fund is still the Vanguard Total Stock Market fund, not a momentum fund.

[MustacheAndaHalf]

I started this experiment 2016-02-17.

(2016-02-17) I intended to use price momentum, and used proximity to 52-week high on accident.  The momentum experiment started with a mistake, buying Vanguard Utilities ETF (VPU).  Oddly enough, the next day  momentum pushed VPU to the top of both criteria.  From this point on, I decided to weight both criteria equally: use the 12 month gain minus the past month for half the fund, and the sector closest to a 52 week high for the other.

(2016-03-22) In past five weeks, S&P 500 +5.3% and VPU +6.4%.  Momentum now pegs consumer staples (VDC) and telecomm (VOX) as the funds to buy, so I sell VPU and buy VDC and VOX equally.  Which is another mistake: I just went over the tax gain budget for the first 5 weeks.  I allocated a max gain of 4%, but just cashed in a gain of 6.4%.  So I'll be locked out of trades until the tax gain budget catches up.

(2016-04-27) Couldn't switch funds for lack of tax gain budget (1.5% / 5 weeks).  Keeping VOX and VDC.

Between 2016-03-22 and today (2016-05-18):
S&P 500 ETF ("VOO") +0.1%
Cons Staples + Telecom ("VDC" & "VOX") +0.0%

[maginvizIZ]

Interesting strategy.  I'm currently getting my masters in finance at the University of Utah; my professor was talking about this strategy and how there is an opportunity to beat the market with this strategy.


Blackrock has recently created some "smart beta ETFs" with one fund as a momentum etf. If you look up MTUM and compare it against SPY, it actually has done better for the last 3 years (41% vs. 26.7%).  It will be interesting to watch yours unravel, and whether a company like vanguard picks up on these strategies easy enough to put into an ETF (I doubt it).  MTUM has a .15% expense ratio; I've been tempted to put it into my portfolio.

[PhysicianOnFIRE]

I see nothing wrong with using some "play money" to try different investing strategies. Keep us posted. MTUM sounds interesting. The outperformance over 3 years is solid. 

Best to keep "play money" limited to 5% of the portfolio or less. I've got about 1% in a small microbrewery, and will be putting in another 0.5% to another.

[MustacheAndaHalf]

teltic - Note the experiment here is more limited, and probably worse than a fund which buys and sells stocks based on momentum.  Unlike the fund, the mixture of stocks in a sector will have mixed momentum.  I could very well believe momentum beats the S&P 500 while sector rotation does not.  But in order to save on buying/selling costs, I picked sectors owing to the low cost ETFs available at Vanguard.  So you might want to avoid sector rotation as a full portfolio strategy.

PhysicianOnFIRE - Play money here is under 1% of my portfolio.  Unlike a small cap or value tilt, some sectors are only 1% of the economy and could behave dramatically different from the S&P 500.  But in practice I don't expect too much difference from 100+ stocks picked from one specific sector.

Tomorrow is my next date to make a purchase, and currently Utilities are in the lead on both momentum measures I'm using.  So I should have an update tomorrow.

[MustacheAndaHalf]

The following two sectors were held for 10 weeks, from 3/22 to 6/1:
Cons Def (VDC), buy $133.74, sell $135.63, gain of +1.4%
Telecomm (VOX), buy $90.68, sell $91.43, gain of +0.8%
Return from 3/22 to 6/1 was +1.1% versus S&P 500 return of +2.6%

The strictness of the fund's tax management impacted performance.  On 4/22 the fund was prevented from switching to Utilities (+1.6% for May) because of a strict tax gains budget.  Instead the fund remained in telecomm and consumer staples (+0.0% and +0.8% for May) as they lost momentum.  To address this the gains budget will be changed to be more flexible: +4% per quarter, and +4% during the year (total +20% max realized gains).

Overall record from 2/17 to 6/1 is +7.6% for experimental fund, +8.1% S&P 500.

[MustacheAndaHalf]

This momentum experiment has 200% turnover in 5 months.  Here's the prior purchase decisions:
2/17: utilities
3/22: consumer staples, telecom
6/01:  utilities

Since 6/1, Utilities are up +7.1% while the S&P 500 lost -0.5%.  Note decisions for the upcoming 5 weeks can change quickly - yesterday REIT topped one of the signals, today it's back to utilities for both momentum signals.  So the experiment keeps utilities for the next 5 weeks.

Overall record from 2/17 to 7/6 is +15.2% momentum experiment, +7.6% S&P 500.

[PizzaSteve]

This momentum experiment has 200% turnover in 5 months.  Here's the prior purchase decisions:
2/17: utilities
3/22: consumer staples, telecom
6/01:  utilities

Since 6/1, Utilities are up +7.1% while the S&P 500 lost -0.5%.  Note decisions for the upcoming 5 weeks can change quickly - yesterday REIT topped one of the signals, today it's back to utilities for both momentum signals.  So the experiment keeps utilities for the next 5 weeks.

Overall record from 2/17 to 7/6 is +15.2% momentum experiment, +7.6% S&P 500.

Are returns adjusted for tax efficiency?  Just curious, as transaction costs, spread and tax inefficiency usually eats up most arbitrage type strategies that might work on paper.

[MustacheAndaHalf]

This momentum experiment has 200% turnover in 5 months.
...
Overall record from 2/17 to 7/6 is +15.2% momentum experiment, +7.6% S&P 500.

Are returns adjusted for tax efficiency?  Just curious, as transaction costs, spread and tax inefficiency usually eats up most arbitrage type strategies that might work on paper.

No, and that's important.  The longer this experiment runs, the more taxes matter.  When momentum pays short-term gains, that money goes to the IRS the next year and at a higher tax rate.  The S&P 500 doesn't sell, and doesn't owe tax yet - so it earns money in the meantime, and years later pays a lower tax rate on long-term gains.  Right now momentum got lucky - the economy took a hit while it had 100% utilities.  So even a tax hit in the first 5 months won't erase the +15% vs +8% gap... but I expect that gap is temporary, and taxes matter.

Your other questions are why I selected Vanguard ETFs.  Vanguard ETFs are traded frequently and cost $0 for Vanguard account holders.  I track actual purchases: the bid-ask spread is reflected in the purchase and sale price, and even includes a tiny SEC transaction fee.  The benchmark S&P 500 ETF is typically $0.01 bid-ask spread on $195/share, so although I don't purchase the benchmark there's very little bid-ask spread there.

I hope to add after-tax performance in the update next month, which will be much more accurate and spreads the word about viewing investing with after-tax efficiency in mind.

[MustacheAndaHalf]

Utilities performed poorly this past month relative to the S&P 500.  This momentum experiment was 100% in utilities, and took the full brunt of this gap.  Measuring performance since 2/17/2016:
Ignoring taxes, momentum experiment +9.06% versus +12.00% benchmark.
After taxes, momentum experiment +6.79% versus 10.20% benchmark.

I'm assigning the benchmark S&P 500 a tax rate of 15% and momentum a tax rate of 25%.  This captures the common S&P 500 buy-and-hold approach that involves long-term capital gains rates.  In general S&P 500 involves a choice of waiting to sell at long-term rates, while momentum does not.  Note 25% is the median tax rate in the U.S., with 15% being the corresponding long-term capital gains rate.

One switch in how the fund picks sectors: buy the tied sectors.  When sectors are closely grouped at the top of one momentum measure, all of the sectors within 3% of the top will be purchased equally.  This has occurred several times in the past - one near miss involved 4 sectors tied for new highs.  Since it wasn't a scheduled purchase date, it had no impact.  But these ties represent information the fund is ignoring, and buying the tied sectors equally should better represent which sectors have momentum.

Momentum switched from 100% utilities to four sectors of 25% each:
25% utilities (performance momentum)
25% telecomm (0.998 tie)
25% information technology (closest to 52-week highest price)
25% materials (0.9833 tie)

[MustacheAndaHalf]

I skipped the 9/14 posting, which breaks the audit trail of these posts.  Sector momentum for industrial and telecommunication sectors fell to low and both were sold.  That caused the fund to buy more utilities, and more info tech.  Performance was bad then, and will remain bad now (relative to S&P 500 benchmark, incl taxes).

This month is still bad, but more interesting.  One of the annoying things with the momentum measures is selling and buying of the same sectors.  For example, utilities lacked momentum and both the 1 month holding and 4 month holding were sold.  Replacing utilities is telecommunications (which was sold last month, and has now been bought again).

The other momentum measure struck a 3-way tie between information technology, energy, and financials.  So 2/3rds of the existing information technology holding was sold, making room for an equal split between the three.  I think this is the first time either energy or financials had any momentum since the experiment started in Feb 2016.

The sector momentum experiment is +6.2% so far, or +4.7% after taxes (ST 25% rate).
The S&P 500 benchmark is +10.3% so far, or +8.8% after taxes (LT 15% rate).

[arebelspy]

Following!

Thanks for the honest and (semi)faithful updates.  :)

[maginvizIZ]

Interesting stuff!  I really appreciate the updates!  Maybe at year end I'll help nerd out and see if holding both would lower your standard deviation.

[MustacheAndaHalf]

Appreciate the feedback - wasn't sure if the thread was filling a void or just speaking into a void.  :)

Consider reading the paper "FTSE Momentum Factor" to learn what I learned.  I picked two of the momentum measures they studied, as they described them.  But momentum of Vanguard sector funds was purely a guess on my part based on $0 cost to trade and dividing the market up as finely as possible.  That's fine for an experiment, but if you put money behind the idea it's all based on a guess.
http://www.ftse.com/products/downloads/FTSE_Momentum_Factor_Paper.pdf

I'd also like to highlight how flaky sector momentum can be.  Last week's purchase turned over about 83% of the fund's assets compared to the prior purchase.  If this week was another checkpoint, it would have turned over 83% again, reverting back to the September holdings.  In the first 8 months of this sector momentum experiment, turnover has been 400%.  Often when I check a day early, the sectors differ from the next day.  Actually "financials", one hour later was no longer part of a 3-way tie.

[arebelspy]

Appreciate the feedback - wasn't sure if the thread was filling a void or just speaking into a void.  :)

Consider reading the paper "FTSE Momentum Factor" to learn what I learned.  I picked two of the momentum measures they studied, as they described them.  But momentum of Vanguard sector funds was purely a guess on my part based on $0 cost to trade and dividing the market up as finely as possible.  That's fine for an experiment, but if you put money behind the idea it's all based on a guess.
http://www.ftse.com/products/downloads/FTSE_Momentum_Factor_Paper.pdf

I'd also like to highlight how flaky sector momentum can be.  Last week's purchase turned over about 83% of the fund's assets compared to the prior purchase.  If this week was another checkpoint, it would have turned over 83% again, reverting back to the September holdings.  In the first 8 months of this sector momentum experiment, turnover has been 400%.  Often when I check a day early, the sectors differ from the next day.  Actually "financials", one hour later was no longer part of a 3-way tie.

Odd.

Whenever miles explained his momentum strategy, he always claimed that turnover/any action at all was very rare.

I wonder if that's because:
A) Of the time frame he was talking about--he hadn't had much activity to that point, but recently he has, like you, due to market movements,
B) He has a significantly different momentum strategy than you, so he actually does have quite a bit less turnover than you, or
C) Other

[Crushtheturtle]

Odd.

Whenever miles explained his momentum strategy, he always claimed that turnover/any action at all was very rare.

I wonder if that's because:
A) Of the time frame he was talking about--he hadn't had much activity to that point, but recently he has, like you, due to market movements,
B) He has a significantly different momentum strategy than you, so he actually does have quite a bit less turnover than you, or
C) Other

Per his blog post on the subject, Dual Momentum compared the relative performance of global asset classes, and not sectors.
For example, comparing the 6 month look back of VTI, VXUS and short term T-Bills. Such broad Indexes would not be as volatile as sectors.

[Retire-Canada]

Miles' last annual momentum update on his blog [also last post there] was 15 Nov 2015 so perhaps he will post another update shortly or he may have gone off the strategy since last year?

[arebelspy]

Thanks for the clarification, Tux!

[MustacheAndaHalf]

I'll clarify what I use, but please discuss momentum in general in a new thread or this one will be sidetracked.

Per the white paper I just mentioned, this experiment uses the past 12 months ignoring the last month.  So 11 months of data, skipping the most recent month.  The two momentum measures are percentage gain, and proximity to 52-week high.  If one sector is closer to it's 52-week high than any other, it has more momentum.  Similarly, whichever sector gained the most in the 11 of the past 12 months (ignoring prior month) has momentum.

I take the worst and best momentum sectors, and mark those as 0% and 100%.  All sectors above 97% are considered to tie, and are used in the next purchase.  Vanguard's sector funds are bought in whole shares, so any cash of less than 1 share is leftover.  Otherwise the fund is 100% invested in sector funds at all times - no bonds.

My goal for this thread is to document the purchase decisions, mistakes and all, so that a record is created showing the purchases made.  Someone "auditing" this thread could go back and trace each purchase and verify the performance.  I also want to answer questions about this experiment as they arise, but I'd like to keep my thread from veering off that focus.

[MustacheAndaHalf]

Vanguard has 11 sector funds (REIT, Energy, etc) which together roughly represent the stock market.  I take 52 weeks of price history, subtract 4 weeks of price history, and use that number to rank the 11 sector funds.  Separately, I measure 52-week high vs current price, and again rank those 11 sector funds.  The top fund of each criteria gets 50% of the investment.

Note that I'm using blocks of the stock market (the sector funds) which may not have very good momentum signals.  The stocks in each sector are likely a mixture, and I'm using sector funds as an experiment.  If Vanguard had another way of dividing the market into ~11 pieces and $0 transaction costs, I might use that.  This in no way is a vote for using sector funds and momentum - it's an experiment.

Ties are tricky to explain.  If the worst fund is -10% and the best fund is +20%, there is a 30% gap between them.  I rank all the other sector funds from 0.00 to 1.00 using the best and worst performers as the two extremes.  Anything at 0.97 to 1.00 is tied with the top performing 1.00 scoring sector.  All funds involved in the tie are purchased equally.  This way when sectors are very close in top performance, I capture both.  Note the idea of a "tie" was introduced during the experiment, not at the start.

[MustacheAndaHalf]

The U.S. election switched which sectors had momentum, creating a 5-way tie.  Half of this fund invests in "price momentum", which is the current price divided by the highest price in the past 12 months.  With 5 sectors near new highs, those 5 form a tie.  The other half is "performance momentum", which invests in the best 12 month performance minus the past 1 month performance (sample 11 months of performance, then wait 1 month to buy it).

It might help to illustrate the buys and sells by percentage of fund assets:
50% telecom sold (VOX), 50% utilities bought (VPU)
6.7% finance sold (VFH) to switch from 3-way tie to 5-way tie
6.7% energy sold (VDE) to switch from 3-way tie to 5-way tie
16.7% information tech (VGT) sold, no longer part of 3-way tie
10% industrials (VIS) bought as part of 5-way tie
10% materials (VAW) bought as part of 5-way tie
10% consumer discretionary (VCR) bought as part of 5-way tie

I didn't run the performance numbers yet, but it looks like the fund beat the S&P 500 for the past 5 weeks by a slim margin.  S&P 500 +3% (2.6% after tax) and momentum +4% (+3% after tax).  Note the greater tax impact reduces momentum's lead by about half.

[MustacheAndaHalf]

On the last trading day of the year the momentum experiment sold most of it's prior funds and bought:
50% Vanguard telecom (VOX, was 0%)
50% Vanguard Energy (VDE, up from 10%)

Vanguard Financials (VFH) did well but probably not enough to rescue the other holdings.  I'm tried to implement an easier way to automatically calculate profit but hit snags, so I don't have the final results yet.  I'm posting now so I don't stall this update while I work on the profit for the year (Feb - Dec).

[arebelspy]

Just XIRR in excel based on deposit dates/amounts and ending value.

[MustacheAndaHalf]

I'll keep that in mind in case I don't go through with the automation I'm attempting.  I'd like a setup that both calculates profit and provides automated suggestions of the next investment.  And a further complication is money I used for a second experiment was merged in (like a failed fund!).

My other experiment was with small/mid/large value/growth splits of the market.  But most of the time was just alternating between large/growth and large/value, so I ended it.  It did not seem to split the market into very many pieces, which I felt is important.  So that money merged into the sector momentum experiment, and I backdated its performance to match the rest of the funds.

It would also help if I had more time to make changes to the sector momentum spreadsheets.  I've devised a spreadsheet with more detailed tracking, but only got it half filled in.  And then I need to make calculations and automation part of it.

Even now, I still have to manually sort the sector funds by performance.  I haven't had time to automate that - I think it would involve the raw data being in one place, and the sorted data being developed from the raw data.

[arebelspy]

Spreadsheet that pulls in quotes and spits out keep same or move based on the criteria you set.

[flyersman]

On the last trading day of the year the momentum experiment sold most of it's prior funds and bought:
50% Vanguard telecom (VOX, was 0%)
50% Vanguard Energy (VDE, up from 10%)

Vanguard Financials (VFH) did well but probably not enough to rescue the other holdings.  I'm tried to implement an easier way to automatically calculate profit but hit snags, so I don't have the final results yet.  I'm posting now so I don't stall this update while I work on the profit for the year (Feb - Dec).

Does Fidelity have similar equal funds for VOX, VDE, etc?

[MustacheAndaHalf]

For the spreadsheet crowd, SORT() came in handy.

As to sector momentum elsewhere, keep in mind this is not proven - it's an experiment I thought up.  I thought how can I divide the market into the most slices, with no cost transactions.  So having given that warning, you could look at iShares sector funds which I believe are free to buy & sell at Fidelity.  But iShares has duplication in it's list of sectors, so you'll need to narrow their full list down to just one ETF per sector.

[MustacheAndaHalf]

In today's wrestling contest... we have the benchmark S&P 500 in this corner, gaining +1% over the past 5 weeks.  And in the other corner... oh no!  It's Trump trashing the momentum experiment!  Owch, that looks like it hurt.  And momentum goes down -2% for the 5 week period.

S&P 500: +1.1% applying 15% tax rate: 0.9%
momentum: -2.0% applying 25% cap loss: -1.5% (IRS shares capital losses)

I've stopped making a running total of momentum performance, as I need to separate the experiment into the additional funding period and the period after that.  Haven't kept up the spreadsheets enough.  The momentum experiment turns 1 year old this month.  Momentum suffers during volatility (signal says buy, and after buying things change), so maybe this can become a perverse experiment in negative performance.  Here's the buy/sell decisions based on momentum this time:

-50% sold VDE (energy)
-50% sold VOX (telecom)
+50% buy VCR (consumer staples)
+25% buy VAW (materials) 2-way tie
+25% buy VFH (financials) 2-way tie

[Retire-Canada]

Thanks for the update. I checked over at Miles' blog to see if there was an update since it's been over a year from his last momentum post. He's not posting any more on that topic it seems.

[arebelspy]

Thanks for the update. I checked over at Miles' blog to see if there was an update since it's been over a year from his last momentum post. He's not posting any more on that topic it seems.

Yes, his blog as a whole has been really dead since he was banned from this forum for some poor communication choices. This momentum strategy is pretty interesting and M+1/2, I appreciate the regular updates.

It was at that time he started his miles hacking thing, and that has kept him busy, from what I understand.

[WallStreetPhysician]

I'm trying an experiment with a tiny fraction of my portfolio, where I see what it's like to apply momentum algorithms to a sort of tax-managed mini-fund.

Here's the criteria I imposed on this experiment:
* momentum involves lots of buying and selling, so I need to limit the costs involved with trades
* insignificant compared to my portfolio (under 1%)
* benchmark against S&P 500
* limit the tax impact

So what I decided on is sector rotation using Vanguard funds.  That way I'm covering the market (roughly), trades are $0, and expense ratio of the holdings are also low.  I allocate 20% gains over the year, and will skip buy/sell until this "tax gain budget" has enough room.  I'll start posting results and observations later in this thread.

Important caveat: this experiment will prove nothing.  Meaningful data would require years, and I don't plan to run it that long.  The best fund is still the Vanguard Total Stock Market fund, not a momentum fund.

Good luck with the trading. I wrote a post about my advice for people who want to try out a trading strategy:

MOD EDIT: Spam link removed.

In short, keep it a small part of your portfolio, do it in a retirement account, know your edge over other investors, and track your performance.  If you aren't doing well, quit trading and don't try to chase losses.  Good luck!

[MustacheAndaHalf]

WallStreetPhysician - I am not asking for advice in this thread.  You seem more interested in quoting your website than understanding the purpose of the thread by going through the posts.  Please don't tangent the thread into something it's not.

Just to refresh the difference between this experiment and other momentum approaches, this experiment is worse.  It takes the 11 Vanguard sector funds and switches between them based on two momentum factors: sector with most gain, sector closest to it's 52 week high point.  The switch happens every 5 weeks.  Nobody has suggested sectors can be used to capture momentum, so this is truly an experiment in that regard.

I've pieced together the following performance from this thread, and from some scattered data:
2/17 - 10/19 : +10.3% S&P 500 and +6.2% sector momentum experiment (+4% S&P)
10/19 - 11/23 : +4% S&P 500 and +3% sector momentum   (+1% S&P)
11/23 - 12/28 : +1.8% S&P 500 and +3.8% sector momentum  (-2% S&P)
12/28 - 2/1 : +1% S&P 500 and -2% sector momentum  (+3% S&P)

Overall I roughly estimate +18% for S&P 500 (pre-tax) and +11% for sector momentum (pre-tax) over the experiment so far (~50 weeks).  Taxes are 15% for S&P 500 (assumes 1+ yr holding) and 25% for sector momentum (always sells within 1 yr), which gives S&P 500 +15% after tax, and sector momentum +8% after tax.  I double checked the S&P 500 performance on Google Finance and also got +18%.

After almost one year, roughly +7% better performance from S&P 500 investing than sector momentum.  This does not say anything about other ways to invest in momentum (individual stocks).

[MustacheAndaHalf]

This experimental fund buys whatever sectors have momentum every 5 weeks.  I plan to start using the term "5W" to describe this experimental fund, since it takes less words to say "5W fund".  It does not imply this idea is smart or successful because it has a label - it fell behind the S&P 500 in the past 5 weeks, so "S&P 500" is a much better label to work with.

Performance momentum picked VFH (Financial) since it's performance was highest of the sectors.  For stock price momentum, VGT (Info Tech) was closest to it's 52 week high.  Both of these had no ties, so the fund switched to solely these two:
VGT, now 50%
VFH, was 25%, now 50%
VAW, was 25%, sold
VCR, was 50%, sold

Side note: poor execution probably added ~0.1% to the cost of two trades.  Two trade executions were strangely outside the bid-ask range before and after the trade.  The cause is less interesting than the fact that without the actual trade, this cost wouldn't show up.

Performance of S&P 500 in the past 5 weeks was about 4.3%, or 3.7% after LT tax.
Performance of 5W fund in past 5 weeks was about 2.1%, or 1.6% after ST tax.
In both cases, 5W fund fell -2% behind it's benchmark for the past 5 weeks.

[Cycling Stache]

MustacheAndaHalf, I appreciate that you continue to update this thread.  It allows people to see how your experiment is working in real time, rather than a retrospective that has the potential to skew to whatever you wanted the results to be.

How long do you plan on keeping this experiment going, and are you doing so at this point to further the experiment, or because you really believe it's a better potential investment strategy than VTSAX or whatever broad index fund you want to use as a benchmark?

[MustacheAndaHalf]

I mostly keep it going out of.. uh, momentum.  I don't believe this idea will be profitable - it has too many compromises, and the S&P 500 is an excellent and unrelenting opponent to any active investing attempt.  For example, the "financials" sector itself contains both stocks with and without momentum, but this experiment can only buy an entire sector at a time.  So "pure momentum" funds can pick and choose their stocks, this 5W fund cannot.

But I actually continue it to learn.  I don't often dwell on the tax aspect, but that's been interesting.  I started wanting every aspect to show up - including these trades on my personal tax bill.  So I set a maximum gain budget to limit the tax impact.  My budget was too inflexible and was hit immediately.  I learned to provide quarterly "max gains" and a sweeping amount for the year.  It's also clear that the fund switches so often that everything is short-term taxable gains or losses.  I have recently decided this isn't so interesting, and am moving the fund into a tax deferred account so it has no impact on my personal taxes.

Ranking all sectors by hand using two criteria is annoying.  First I automated the calculation, but had to do my own sorting.  Then I setup automatic sorting and tie detection, and it's much easier to know what to purchase next.

The 5W fund is embarrassingly short-sighted.  For example, on day one of the experiment I bought the wrong sector.  I was doing calculations by hand.  The next day?  It was the correct purchase.  Sometimes the top ranked sector changes within hours, sometimes days.  It's also interesting to me how often I make mistakes, and what precautions I need to make against that.

Overall I continue because of learning from it, and I should probably post more about that topic.

[MustacheAndaHalf]

Per my post, imam curious for data on your tax, spread, and transaction costs as annual % numbers.  Please post if you get a chance.  For example, i have also observed the risks of ETF spreads being manipulated especially at market open resulting in trades outside the spread (hidden broker dealer profit sniping)

Per your earlier post, I started including tax brackets.   Notice how I now mention "after tax" profit, using LT and ST tax rates.  I assume 5W fund always sells within a year (I assume 25% tax) while S&P 500 is buy/hold (I assume 15% tax).

I never trade exactly at market open, but I have traded within 30 min of the opening bell.  I definitely saw purchases outside the listed bid-ask spread this last time, but that's unusual.  In general I don't track this specifically, but I do track every purchase made.  So when the 5W fund pays more because of a larger spread, that will be reflected in profits (less bought, less profit).

[MustacheAndaHalf]

Finished redoing spreadsheets on profits, with the following updated numbers.  Profits are from 2/17/2016 through 3/10/2017, roughly 13 months.
5W fund, pre-tax +14.5%.   With ST tax of 25%, +10.9%
S&P 500, pre-tax +22.4%.  With LT tax of 15%, +19.1%
The "5W" sector momentum experiment trailed it's benchmark by about 8% both before and after taxes.

I have spreadsheets to track purchase, sell, and performance.  The performance spreadsheet wasn't keeping up with ties well, since those were not part of the original experiment.  Sometimes a sector pulls ahead of a prior tie, causing existing holdings to be increased.  Now the prior position plus any buys and sells are represented in spreadsheet I use to track performance.  It's once again automated and represents performance over the entire experiment (which started Feb 17, 2016).

[MustacheAndaHalf]

The short answer is "no" - the S&P 500 benchmark beat sector momentum by 8%.

5W spent 40% of it's time in utilities, 20% in telecomm, etc.  Applying those percentages to the annual return of each sector shows a return about halfway between sector momentum and S&P 500.  Meaning the timing of sector momentum investments subtracted from returns.

The S&P 500 performed (+25%, year ending 2/28) roughly in the middle of the market's sectors: between the 5th ranked energy sector (+29.1%) and 6th ranked consumer discretionary (+18.4%).  But sector momentum tied the 2nd worst sector of telecomm (13.9%), only beating consumer staples (+12.1%).  It's amazingly bad to beat only 1 sector out of 11.

My definitions of momentum were taken from an MSCI white paper on momentum, but applied to Vanguard sector ETFs.  I wouldn't meddle with the windows of time (52 weeks ignoring the past 4 weeks) used by academics to measure if the market exhibits momentum.  That would entail contesting academics on their home turf to re-invent momentum.

One possible change could be the timing.  But the whole goal of a momentum fund is to switch from investments that have lost momentum to those that have gained momentum.  So making fewer purchase windows per year (say only 4 instead of 10) would result in less momentum investing.  Since the 35 day window was selected to avoid "wash sales", making even more frequent purchases would involve making decisions about sectors that have capital losses but fall under the IRS wash sale provisions.

Another change could be the sampling of momentum.  Instead of once every 5 weeks, momentum could be checked a number of times a day for a number of days.  If yesterday utilities had momentum but today finance does, both could be purchased in equal measure since they had momentum equally during the measuring period.  I have no data to decide if this helps, and it would certainly be more troublesome to automate.

Ultimately I don't have data pointing to changes that could improve 5W sector momentum.  Based on the data I have, the S&P 500 index remains a superior investment.

[MustacheAndaHalf]

I'm altering several polices of this experimental fund.

1) Purchases will be made twice as often, every 2.5 weeks.  The fund previously bought every 5 weeks on Wednesday, with the next trade scheduled for Wednesday, April 12th.  The next trade date will be Thursday, April 13th.  The trade after that will be Monday, May 1st.  The fund will continue purchasing every 2.5 weeks, alternating between Thursday and Monday.

2) Since trades can happen within 30 days of each other, wash sales are now possible.  Wash sales delay realizing capital losses.  In practice the fund exists in a tax deferred space, so this situation will need to be simulated based on the experimental "fund manager's" understanding of U.S. tax law and wash sales.

3) Certain sectors are 3% of the market, while others are more than 15%.  I speculate these small sectors are more interesting, and should be included in ties more often than other sectors.  To implement this speculation, if the tiny sectors get within 95% of the top sector's performance, they will be part of a tie.  Other sectors will need to get within 98% of the top sector's performance to be part of a tie.  The tiny/small sectors are those with about 3% of the market: REIT, utilities, basic materials, and telecommunications.

4) The worst sector will no longer influence ties.  Performance will simply be the top sector's performance.  If the top sector gained +20%, then ties will be based on reaching 0.98 or 0.95 of that performance (19.6% or 19.0% respectively).

Based on the past year, these changes could further negatively impact performance.  By making trades twice as often, this "2.5 week" experiment could take twice the negative impact of momentum.  It's "doubling down" on something that has failed to beat the S&P 500.  Further, in the past year the best sector was finance, which will be part of fewer ties with the new rule.  3 of the 4 small sectors performed in the bottom half of all sectors in the past year.

The fund will retain it's benchmark and history (currently -8% vs S&P 500 for first ~13 months).  It will retain the same calculations of momentum (per MSCI white paper on momentum).  Trades will happen twice as often, and ties will favor small sectors.

[MustacheAndaHalf]

First Thursday purchase (4/13) with next purchase slated for Monday, May 1.  But today is a good day to call "May day!" as well, watching financials dive -6% over the past month.. and seeing this experiment keep financials for next time.

Looks like a defensive posture as information tech was sold, and consumer staples and consumer discretionary replaced it.  Here's the new fund allocation: 
50% financials (still), VFH
0% info tech (was 50%)
25% consumer staples, VDC
25% consumer discretionary, VCR

An ETF tracking consumer goods named "VCR" still amuses me each time.  Over the past 5 weeks the experimental 2.5W fund lost -4% while the S&P 500 took less than a -2% loss.

I did not update the spreadsheets to reflect the new way ties are determined, nor make rankings based solely on the top sector.  So some work to do before the next purchase date.  The "2.5W" stands for 2.5 weeks.  The next purchase date is May 1st, 2017.

[MustacheAndaHalf]

First Monday purchase (May 1 2017) of 2.5W fund experiment.  Both S&P 500 and this experiment gained about +2.5% the past 2.5 weeks.  That still leaves this experiment at -10% relative to the S&P 500 index (it's benchmark).

Performance momentum picked info tech (VGT), while price momentum (highest price in 48 of last 52 weeks) hit a 4 way tie.  So here's the purchases for this round:
12.5% consumer discretionary (VCR), was 25%
12.5% health care (VHT), was 0%
12.5% raw materials (VAW), was 0%
62.5% information tech (VGT), was 0% (performance pick, price momentum tie)

In particular, VGT was the top of both criteria.  Both VCR and VHT were within 1% of the top, and VAW was a small sector within 2% of the top.  The top in this case is the highest price VGT reached in the past 52 weeks (ignoring the 4 most recent weeks).  Current price divided by highest price is the "price momentum" of a sector.

Next purchase date is May 18th per the new 2.5 week schedule.

[MustacheAndaHalf]

The fund lost less than it's benchmark, about -0.1% vs -0.7% for S&P 500.  The 2.5W fund picked some defensive choices of utilities and consumer staples for the next 2.5 weeks.

Sold 1/5th of info tech and all of consumer discretionary to buy utilities and consumer staples.  The new allocation for 2.5W fund is:
50% info tech (reduced from 62.5%)
12.5% financials (unchanged)
12.5% raw materials (unchanged)
12.5% utilities (new)
12.5% consumer staples (new)

All holdings except info tech declined, but the nearly +1% rise in info tech balanced out the losses elsewhere.  Next purchase date is June 5th.

[MustacheAndaHalf]

Another incremental win over it's benchmark, with 2.5W fund gaining +4.9% versus +3.5% for the S&P 500 in the past 2.5 weeks.  Most of the gains are from the large allocation to tech.

Half the experiment tracks price momentum, which is the current stock price of a sector divided by it's highest price over the past 52 weeks.  When the market hits new highs, price momentum sends strange signals like it did today: it signaled to buy 7 of the 11 sectors.  Essentially it didn't buy energy, financial, real estate, and telecom.  So half the fund has diversified into 7 sectors while half the fund remains invested in VGT (info tech).

57.14% VGT
7.14% VDC
7.14% VCR
7.14% VHT
7.14% VIS
7.14% VAW
7.14% VPU

The past 2.5 weeks it beat it's benchmark (by +1.4% before tax), but overall it still lags the S&P 500 (by over 5-6%, roughly) as measured from the start of the experiment (Feb 2016).

[MustacheAndaHalf]

The 2.5W fund/experiment isn't so much mine as running on it's own... momentum.  I don't make decisions at all, excepting rounding up or down with buying shares selected by algorithm.  This 2.5 week period lost ground to the S&P 500.  The S&P 500 only lost -0.3% while the 2.5W fund lost -1.1%.

Because of tech sector performance, the momentum measures stubbornly refuse to pick any other sector for performance momentum.  So the fund remains half invested in VGT, the Vanguard Information Technology ETF.

Price momentum went from a 7-way tie to a 4-way tie.  This half of the fund is now spit between the following 4 funds:
VIS (Industrials) now  25%
VAW (Raw Materials) now 25%
VPU (Utilities) now 25%
VHT (Health Care) now 25%

Yesterday was technically the day to make these purchases so this purchase was one day late, on Friday instead of Thursday.  The benchmark S&P 500 is still well ahead (5-10% range) of the 2.5W fund/experiment since it's inception in Feb of 2016.

[runewell]

Do you have an IRA?  Why not do this within your IRA and then not worry about tax consequences.

Anyone interested in momentum investing might want to check out this site:
http://mebfaber.com/timing-model/

[MustacheAndaHalf]

runewell - Earlier in this thread I mentioned that the fund was moved into a retirement account.

[MustacheAndaHalf]

Looks like an unpredictable world will continue to punish the momentum measures used in this experiment.  The benchmark S&P 500 lost about -0.5% since 6/23, while the 2.5W fund experiment lost roughly -1.2%.

The fund has now held VGT (Info Tech) for more than 2 months, which is 4 updates where it has not been sold off.  This is caused by "performance momentum" tracking whichever sector has had the best performance in the past 52 weeks (minus the most recent 4 weeks).

"price momentum" (how close a sector is to it's 52 week high) made the following changes:
VHT (health care) sold off, now 0%
VPU (utilities) sold off, now 0%
VFH (financials) new position, now 1/6th of fund
VAW (raw materials) increased position, now 1/6th of overall fund
VIS (industrials) increased position, also 1/6th overall

And VGT (info tech) remains the other 50%.

The volatility and losses continue... next update on 7/27.

[MustacheAndaHalf]

"Hm, that's odd.  Why is the VIS holding half the size of the others.  Uh.. and why is the fund holding 8% in cash..." 

Unlike a textbook where mistakes get edited out, this fund/experiment keeps the mistakes.  Last time, the fund was supposed to raise VIS from 12% to 16%.  Funny story, though... you'd be surprised how small that "buy" and "sell" selection box looks... So anyways, instead of a 4% buy order?  Yeah, issued a 4% sell order and didn't notice for 2.5 weeks.  So... the fund actually held 8% VIS and 8% cash for the past 2.5 weeks.

Back to momentum investing, information technology retains its crown for performance.  Performance momentum is stuck on VGT, Vanguard's Information Technology fund. 

For "price momentum", a new 3-way tie emerged.  The, ahem, VIS (industrial) holdings were sold, as were VFH (financial).  Both make room for VCR (consumer discretionary) and yet more VGT (info tech).  As if the fund didn't have enough info tech, it's now 2/3rds in that sector.  So the new holdings become:

66.66% VGT (information technology)
16.67% VCR (consumer discretionary)
16.67% VAW (raw materials)

The fund and S&P 500 were roughly tied in raw performance.  The fund gained +2.5% while the S&P 500 gained +2.4%.  But after taxes are calculated, that's +1.9% for the fund and +2.0% for the S&P 500.

Hopefully the next update won't discover 8% sitting in cash!

[kenaces]

Have you looked into dual momentum strategy as a way to decrease trading costs? 

I had a chance to talk with Meb Faber a few days ago and he seemed to think it might be OK to try to capture some of the "trend" premium.  Of course he has his own EFT(GMOM)/robo/white paper on implementing some momentum into asset allocation.  Just google trinity portfolio.  I find the idea that we can add another asset class(momentum) to both decrease risk and add return but I haven't pulled the trigger on it yet.

[runewell]

Have you looked into dual momentum strategy as a way to decrease trading costs? 

I had a chance to talk with Meb Faber a few days ago and he seemed to think it might be OK to try to capture some of the "trend" premium.  Of course he has his own EFT(GMOM)/robo/white paper on implementing some momentum into asset allocation.  Just google trinity portfolio.  I find the idea that we can add another asset class(momentum) to both decrease risk and add return but I haven't pulled the trigger on it yet.

I really like what Meb Faber has to say, and some of the podcasts on his site are interesting.  His site advocates being in one of five asset classes if the price is above the 10-month moving average, making changes monthly.  From 1972 onwards, this method was barely better than the S&P.  When you go this route, it takes you a bit longer to buy into stocks when they are increasing,  but then you also stay out of the market once it tanks.  It has the effect of steadying things so that your overall returns are good with limited upside and downside.

He suggests in his book that you could do this with as many asset classes as you like.  My only is that I don't think an environment of increasing interest rates is favorable for bonds so my portfolio is usually 90%+ stocks.  So while I don't adopt the strategy exactly (especially since stocks look quite bullish on the chart), I do plan to be very cautious when these puppies turn direction and cross the 200-day moving average.  At that point it wouldn't surprise me to be following all five asset classes more closely. 

There are other momentum strategies as well.