Returns From Momentum Funds
Given how lousy buy-and-hold worked from October 2007 to March 2009, investors are understandably looking for alternatives, including momentum-based ETF trading. In my Rule Your Retirement service, we've recently interviewed a couple of advocates of such strategies, namely, S&P's Sam Stovall (author of The Seven Rules of Wall Street) and Mebane Faber (author of The Ivy Portfolio).
Besides momentum-based strategies, Faber also covers market timing with moving averages (as well as the endowment portfolios at Harvard and Yale, which is what the name of the book refers to). In a recent post on his website, Faber backtested a rotation and timing strategy, with impressive results.
A casual reader might then be led to choose the "easy" route to getting such returns, which would be to buy a mutual fund or ETF that engages in some form of sector rotation, momentum trading, or market timing. In his post, Faber lists several such options. However, he also wrote this: "I haven’t looked at ANY of these funds below so no recs either way. Most of them FAIL for various reasons."
I decided to check out their YTD returns as well as what they did in 2008, according to Morningstar. If the goal was to significantly beat the S&P 500 (as represented by the Vanguard 500) or EAFE (as represented by the Fidelity Spartan International Index, a benchmark for the non-U.S. funds), then "FAIL" they did.
Vanguard 500 Index Investor (VFINX) 0.92 -37.0
Fidelity Spartan International Index (FSIIX) 3.28 -41.4
FundX Tactical Upgrader (TACTX) -3.21 N/A
FundX Upgrader (FUNDX) -3.46 -42.4
Rydex/SGI All-Cap Opportunity (RYSRX) 1.48 -40.2
Rydex/SGI International Opportunity (RYFHX) 3.56 -36.3
PowerShares Value Line Timeliness Select (PIV) -4.67 -46.35
PowerShares DWA Technical Leaders (PDP) -3.94 -46.21
PowerShares Value Line Industry Rotation (PYH) -6.94 -43.60
Claymore/Zacks Sector Rotation (XRO) 3.03 -49.42
Claymore/Zacks Country Rotation (CRO) 6.69 -45.44
The bottom line: If you're looking for a new strategy to avoid the horrendous losses we've seen over the past two years, any old momentum or timing strategy might not do the trick.