Momentum On Dual Momentum Portfolios

By: Marco Simioni

In the first section, this article describes a Dual Momentum study over an iShares country etfs basket with a new attempt to improve this well-known investing style. I chose iShares because it is the world largest family of Exchange Traded Funds (ETFs) from BlackRock. Although different stock markets correlations have become weaker and weaker in these last 10 years, this article easily shows that countries diversification is still feasible.

In the second part, I briefly recall another Dual Momentum Portfolio, the Famous 5 Portfolio, and apply to momentum concept to the two portfolios. This results in a new comprehensive strategy that rotate monthly from Countries Portfolio to the Famous 5 Portfolio or viceversa.

My backtest, highlight that momentum persists not only through single different assets (etfs) but through portfolios as well.

Dual Momentum Countries Porfolio

First of all, Dual Momentum strategies rely on two different very simple filters: absolute momentum and relative momentum.

Absolute momentum (rule 1) is a trend following filter used to switch any selected assets (etfs) that have a negative excess return over the risk free rate to cash while relative momentum (rule 2) criteria compares returns of a basket different assets (etfs) through a ranking list to highlight those assets with the highest return.

I considered a time window of 3 months in my backtest, as it has shown the strongest results.

Rule 1: If the etf shows that the last 3 months return is higher than the risk free rate then buy or keep the etf, if not just switch to cash.

Rule 2: Buy or keep the # etfs with the highest 3 months return if Rule 1 is satisfied, otherwise just move or stay in cash.

Rule 3: Repeat rule 1 and 2 at the close of the last trading day of each month.

I backtested the following portfolio of countries ETFs going back to January 2001 and holding every month the 2 etfs with the highest 3 months return (holding 2 assets instead of 1 improves the results) – (all the available iShares countries etfs were considered):



Applying Dual Momentum strategy more than doubles the Final Balance and CAGR, greatly reducing Max Drawdown of the Equal Weight Portfolio. Equity curve never went back since 2007:


Many traders try to improve results by data mining the etfs data set, excluding those funds with lower historical returns. However, looking at countries, past good or bad performances are not the guarantee of future success or failure. That is why I have included all the countries available since 2001 to avoid overly optimized results.

Sitting on cash while out of the market can obviously be a waste of time, and good results can be achieved simply by switching to SHY (iShares Barclays 1-3 Year Treasury Bond Fund) instead of cash.

Hereafter, the new performance metrics:


GAGR is above 17% and maximum drawdown has been reduced to 23%. Adding SHY to the strategy sounds logical and quite easy. This is a good improvement on the performance metrics, clearly reached without adding tricky overoptimized complicated rules to the dual momentum strategy. Please note how the timing portfolio with SHY instead of cash beat the equal weight portfolio back since 2003, the starting year of the backtest, while in the basic version this was not the case. This can clearly be seen from the following equity curve:


Adding a safe instrument of the monetary market helped both rising return and cutting risk. I considered it “safe” due to the next multi year coming Fed rising rates environment. With the duration limited to a maximum of 3 years, new higher rates can easily be exploited.

Of course, nothing can be taken for granted and that is why until Fed does not start the rising rates process another adjustment should be implemented to the Dual Momentum Countries Portfolio: using TLT (iShares Barclays 20 Year Treasury Bond Fund) instead of SHY. Results are the followings:


To sum up, adding long term treasuries (TLT) might be perceived as an additional risk factor due to the coming Fed restrictive monetary policy, but as far as this has not occurred yet, a portfolio with a growth rate higher than 20% looks very attractive to investors.

The overall strategy performance should turn in favor of the short term treasuries (SHY) option as soon as rates begin to rise, in contrast to the last 15 years decreasing rates/zero rates/quantitative easings financial environment that led TLT based strategy to higher returns.

That is why I shall expect a 20% returns range for the SHY based strategy and a lower one for the TLT based one in the coming years once rates start rising.

Momentum improves Momentum Portfolios

Recently I wrote an article on the Dual Momentum Famous 5 Portfolio on: SystemTraderSuccess Blog

I used the same Dual Momentun strategy of the above Countries Portfolios but with a different basket of etfs:


As with Countries Dual Momentum Portfolio, replacing cash with TLT etf, greatly improves return when out of the market. I quickly recall the stats:


This portfolio has similar returns (CAGR well over 20%) to the Countries Dual Momentum Portfolio. Well, what is interesting to see is how to benefit from the two portfolios with the same account using Momentum concept once more.

Each month, I need to rotate and rebalance each portfolio following the Dual Momentum procedure described in the first section of the article, but first I follow these steps:

STEP 1 If the sum of the last 2 monthly returns of the Famous 5 Portfolio is higher than the last 2 monthly returns of the Countries Portfolio, invest money in the Famous 5 Portfolio for the next month. Viceversa, invest money in the Countries Portfolio the next month.

STEP 2 Repeat step 1 at the close of the last trading day of each month.

Following this procedure we have invested in the Portfolio that shows higher momentum each month. I attached the graphs showing the three equity curves:


The graph starts in January 2006 instead of 2003 because of lack of data in the Famous 5 Portfolio, totally 117 months.

The blue line represents the Countries Portfolio, the red line represents the Famous 5 Portfolio, and the yellow line represents the Aggregate Portfolio obtained switching monthly with the above procedure.

Looking at the above chart, the Countries Portfolio clearly dominates the Famous 5 porfolios until 2011: the intersection point is in the middle of the chart. Then the Countries Portfolio slow back and the Famous 5 Portfolio keeps steeply rising till present.

It is evident the superior performance of the Aggregate Portfolio both when the Countries Portfolio is dominant in the first five years and when the Famous 5 is dominant in the last 5 years.

Momentum holds the test of time as a selection criteria when theFamous 5 Portfolio starts to dominate the Countries Portfolio.


To sum up, applying momentum in a dynamic portfolio selection process helps investors to consistently replicate and overperform most of the time the dominant porfolio that results in:

GAGR 22.3% and Max Drawdown 20.27%.

Risk value lies between the drawdowns on the two portfolios whilst return appear to be the highest.

Adding more different Dual Momentum portfolios to this Momentum portfolio selection criteria will be the topic of further investigation.

By: Marco Simioni

Click here to go to my blog: NightlyPatterns

2 replies
  1. Marco
    Marco says:

    Hello Bernhard!
    Because this parameter shows the strongest results. 3 monthly returns there is not optimal.
    I think it make sense because here we are comparing portfolios and not single funds anymore and we need a shorter period to be more reactive in the portfolio selection.
    Best Regards,


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