A reader asked: “Have you ever looked at the work of David Vomund at ETFtradingstrategies.com?”
ETFtradingstrategies.com is an adjunct to the book ETF Trading Strategies Revealed, which “presents simple but highly effective mechanical ETF rotation techniques. The strategies use relative strength reports to rotate to strong areas of the market.”
Based on the information on the web site, the overall approach appears similar to those of the five asset class momentum strategies noted in “Some Best Guesses on What Works Best”. Momentum in asset prices appears to be fairly pervasive, as indicated by an extensive stream of formal research. In other words, the beliefs that appear to motivate the approach described on the web site have support from research.
Unlike the approach described at ETFtradingstrategies.com, which appears to view going to cash as a market timing decision rather than a momentum decision, some asset class momentum strategies treat cash as an asset class to which one rotates when it is the strongest class.
With respect to the returns reported for the six specific strategies tracked on the site, reasonable cautions would be:
- The backtest samples are fairly small, so statistical inference from them weak.
- Because data snooping bias is likely impounded in the strategy selection process, it is reasonable to assume that out-of-sample performance of these strategies will generally be weaker than the backtested results.
- Broad interest and activity in ETF-based momentum strategies may suppress their future returns as more and more investors compete for the returns.
- Have the authors accounted for trading friction (transaction fees, bid-ask spreads)? The more frequent the rebalancing specified for a strategy (and the smaller one’s account), the greater the impact of trading friction on net returns.
- Taxes from trading are a consideration if executing the strategies in a taxable account.
