Effect of Trading Frictions on SACEMS

A subscriber asked about the effect of trading frictions on Simple Asset Class ETF Momentum Strategy (SACEMS) performance across potential momentum measurement (lookback) intervals, assuming 0.1% one-way frictions for buying and selling exchange-traded funds (ETF). To investigate, we look at the impact of these frictions on the SACEMS Top 1 portfolio, which each month holds the one ETF from the SACEMS universe with the highest past return. We consider lookback intervals ranging from one month to 12 months. We focus on compound annual growth rates (CAGR), since frictions have little impact on maximum drawdown (MaxDD). Using SACEMS monthly holdings and gross returns during February 2007 through March 2021, we find that: (more…)