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In his seminal book Dual Momentum Investing, Gary Antonacci introduces a simple Global Equities momentum strategy, which is supposed to generate consistent excess returns by switching between S&P500, a broad global index and a bond index, according to their relative and absolute momentum.

Now I have two very specific questions regarding variations of this system, which in my opinion are rather obvious but are never mentioned in the book.

  1. Could the S&P500 be replaced by another index such as the Nasdaq100?
  2. Could the bonds index which is used as "save haven" for down trends be replaced by gold?
  • Why not backtest it yourself? – xiaomy Apr 24 '17 at 20:52
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There's a few layers to the Momentum Theory discussed in that book.

But speaking in general terms I can answer the following:

  1. Could the S&P500 be replaced by another index such as the Nasdaq100?

Kind of. Assuming you understand that historically the Nasdaq has seen a little more volatility than the S&P. And, more importantly, that it tends to track the tech sector more than the general economy. Thus the pitfall is that it is heavily weighted towards (and often tracks) the performance of a few stocks including: Apple, Google (Alphabet), Microsoft, Amazon, Intel and Amgen.

It could be argued this is counter intuitive to the general strategy you are trying to employ.

  1. Could the bonds index which is used as "save haven" for down trends be replaced by gold?

This could be tougher to justify. The reason it is potentially not a great idea has less to do with the fact that gold has factors other than just risk on/off and inflation that affect its price (even though it does!); but more to do with the fact that it is harder to own gold and move in and out of positions efficiently than it is a bond index fund.

For example, consider buying physical gold. To do so you have to spend some time evaluating the purchase, you are usually paying a slight premium above the spot price to purchase it, and you should usually also have some form of security or insurance for it. So, it has additional costs. Possibly worth it as part of a long-term investment strategy; if you believe gold will appreciate over a decade. But not so much if you are holding it for as little as a few weeks and constantly moving in and out of the position over the year.

The same is true to some extent of investing in gold in the form of an ETF. At least a portion of "their gold" comes from paper or futures contracts which must be rolled every month. This creates a slight inefficiency. While possibly not a deal breaker, it would not be as attractive to someone trading on momentum versus fundamentals in my opinion.

In the end though, I think all strategies are adaptable. And if you feel gold will be the big mover this year, and want to use it as your risk hedge, who am I or anyone else to tell you that you shouldn't.

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