SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Steady Momentum ETF Portfolio


Last May, I wrote an article about how to analyze an investment strategy. Today I’ll use the concepts from that article to explain how the Steady Momentum ETF Portfolio (available as a bonus strategy to Steady Momentum subscribers) meets the criteria described in that article.

Our Steady Momentum ETF Portfolio (SMETF) starts with a focus on global equities. From 1971-2018, the MSCI All Country World Index (ACWI) had an annualized return of 9.52%. As a proxy for cash, US T-bills returned 4.65% during this period, meaning the global equity risk premium was 4.87% per year.


image.png

Charts created at www.portfoliovisualizer.com


This risk premium, known as market beta, is one that we expect to persist in the future, and it forms the foundation of our investment philosophy.  The future size of the equity risk premium is of course impossible to predict, but history is a great teacher.


In addition to market beta, I’ve written about other factors that drive equityreturns, such as company size (large cap vs. small cap) and relative price (value vs. growth). See my article Do All Stocks Have the Same Expected Returns? Small stocks that are also value stocks have higher than market risk, and therefore higher than market expected returns. Below I’ll add the Dimensional Small Cap Value Index to our chart as portfolio 2.

 

image.png

 

Like market beta, the size and value factors have been persistent throughout time and pervasive across the world. By including US and Ex-US small cap value ETF’s in our SMETF Portfolio, we increase expected returns and diversification. But market beta risk still dominates the portfolio, meaning that whether it’s US or Ex-US, large cap or small cap, value or growth, they are still equities and tend to decline simultaneously during most periods of crisis such as 1973-1974, October 1987, 2000-2002, 2007-2009, and even more recently in Q4 2018.
 

To manage downside exposure, there is one additional return driver that factor research has found to be robust and that meets our strict criteria.


“Momentum is the biggest example (of an anomaly to EMH). It’s very difficult after that to find anything that is robust…Lots of anomalies disappear when you apply them to new data but not the momentum effect. Robustness is the name of the game…momentum is one anomaly that seems to be robust, and it is what it is, you have to live with it…it contradicts market efficiency I think, but that’s the name of the game. All scientific theories have anomalies…otherwise they’re not theories, they are reality.” –Eugene Fame, Nobel Laureate, Economic Rockstar podcast 2018


In SMETF, we incorporate momentum based on the “dual momentum” concepts pioneered by the author and blogger, Gary Antonacci. The ruleset for Gary Antonacci’s Global Equities Momentum version of dual momentum is as follows:

image.png


Gary’s research focuses on a 12-month lookback for a variety of valid reasons, but in our SMETF Portfolio we use an ensemble approach of multiple lookbacks to minimize parameter selection risk. We also implement a noise threshold in order to reduce unproductive turnover when portfolio changes would otherwise be small on a month to month basis. Newfound and Resolve have both written educational papers and articles on these ideas intended to build upon the excellent work of Gary Antonacci.
 

To bring it all together, portfolio 3 in the next chart gives us a loose historical representation of how a strategy similar to our SMETF Portfolio may have performed. Rebalancing is assumed to occur monthly.
 

image.png

No transaction costs, taxes, or other fees have been included, and past performance doesn’t guarantee future results.Investors cannot invest directly in an index. Backtested results have certain limitations that should be considered. Investors should not rely exclusively on this information to make investment decisions.


Conclusion

We started this article by showing how a simple globally diversified equity index has provided a significant risk premium over the last 47 years. We then built upon this base case by including additional factors such as company size and relative price. Finally, we looked to the “premier market anomaly” of momentum to further improve results. Members of Steady Momentum have access to this simple yet powerful portfolio in the form of monthly trade alerts with a small basket of ETF’s. There is also additional education on the member’s forum, along with the precise portfolio allocations. For only $89/month, we welcome you to join us on our long-term journey together as a community. Start your free trial today. 
 

Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™ professional. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University. Jesse manages the Steady Momentum service, and regularly incorporates options into client portfolios.

 

 

 

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Bullish Short Strangles

    A bullish short strangle sounds like a complicated strategy, but it’s really quite simple for those familiar with option terminology. A short put is combined with a short call to where the position starts with some amount of positive delta overall. This distinguishes itself from a delta neutral strangle, where both the short put and short call are sold at the same delta.

    By Jesse,

    • 0 comments
    • 41 views
  • Eight Mistakes Every Forex Trader Should Avoid

    The forex market is currently the largest financial market in the world and, due to its highly liquid nature and low barriers to entry, is only expected to grow. Becoming a forex trader requires minimal effort and with a decent internet connection, a laptop or computer, and some spare money to invest, you can start in no time.

    By Kim,

    • 0 comments
    • 35 views
  • Put/Call Parity - Two Definitions

    Put/call parity is a term options traders use to mean one of two things. The simplest definition and the one most applicable to most options traders compares the similarity in the bid/ask spread and the net debit or credit resulting from this.

    By Michael C. Thomsett,

    • 0 comments
    • 228 views
  • Put Selling: Strike Selection Considerations

    When selling puts, such as we do in our Steady Momentum PutWrite strategy, there are many questions a trader must answer: What expiration should I use? What strike should I sell? Should I choose that strike based on delta or percentage out of the money?

    By Jesse,

    • 0 comments
    • 260 views
  • What Can We Learn From UBS YES Lawsuit?

    News followers may have seen the recent stories on UBS being sued by its clients and investors who participated in UBS’s “Yield Enhancement Strategy (YES).”  Evidently, numerous UBS clients signed up to participate in an iron condor strategy that lost a lot of money.They’re angry, and they’re filing a lawsuit.

    By cwelsh,

    • 2 comments
    • 863 views
  • Pinning Down the ‘Option Pinning’

    What many people on SO have in common is that they have read the books of Jeff Augen on options trading. Although written a decade ago they continue to be an interesting source of strategies for the retail investor. Retail investors have particular constraints that make most of the broad theoretical musings on options rather moot.

    By TrustyJules,

    • 0 comments
    • 367 views
  • Holding Positions into Expiration

    "Every once in a while you must go to cash, take a break, take a vacation. Don't try to play the market all the time. It can't be done, too tough on the emotions." - Jesse Livermore

    By Mark Wolfinger,

    • 0 comments
    • 294 views
  • Tales Of How Big Trades Went Wrong

    One way to learn from your past mistakes is having to go through the painful and challenging experience of explaining them. Another way is to listen to others who might have lived through some disgruntling trades. Joseph Trevisani goes deep into the rationale he followed during the volatile EUR/JPY days of 2007 in this article.

    By Kim,

    • 0 comments
    • 302 views
  • Covered Straddle Explained

    The covered straddle is a perfect strategy for those all too common sideways-moving trends. When a company’s stock is in consolidation, how can you make trades? No directional trend exists, so most traders simply wait out this period.

    By Michael C. Thomsett,

    • 0 comments
    • 454 views
  • Why Doesn't Anchor Roll The Long Calls?

    Recently, an Anchor subscriber asked, “Why don’t we roll the long calls in the Leveraged Anchor portfolio after a large gain and take cash off the table?”  This question has a multi-part answer, from taxation to how the delta on a position works.

    By cwelsh,

    • 0 comments
    • 283 views

  Report Article

We want to hear from you!


There are no comments to display.



Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs