Great article on the power of combining factor investing with a systematic momentum overlay. It’s rare to see a strategy that effectively mitigates the decade-long underperformance periods often seen in pure factor plays.
Have you tested how sensitive the CAGR is to the specific look-back period—for instance, does using a 6-month vs. a 12-month momentum window significantly change the drawdown protection results?
I have tested every possible look-back period with the monthly data. The CAGR stays significantly above market level, regardless of the lookback period, but the alpha gradually declines the further I move away from the selected monthly intervals, as you would expect.
So, it seems the system would do well with most settings, but I optimized it for the most consistent outperformance based on the 2000-2020 data.
You can feel the years of trial and patience behind this. The discipline to stick with a system is what most people struggle with. It’s a steady approach that seems to value consistency over excitement.
It does require discipline to stick with a system.
And yes, my main priority was to build a system with high consistency in the returns. There are lots of trading systems available that deliver higher CAGRs but with much higher volatility. Personally I don't have the risk profile to stick with these, so I had to invent my own.
You should execute the trade after you receive the monthly trade signal in your inbox. Ideally on the first day of the month, but the sooner the better.
The whole back-test and my five years of trading the system in real life have been based on trades executed at the turn of the month or on the first trading day of the month.
Can you show precisely which ETFs were your factor ETFs and sector ETFs? And how did you know which factor or sector to switch to? You just picked the best performing one over the last twelve month window? And when did you know to switch to cash?
Actually I have received a lot of requests for specific ETF tickers. I didn't originally include these because the availability of each ETF depends on the country you live in. But I will assemble lists of suggested ETF tickers specifically for the US and EU markets in the next article I send out! 👍
Regarding the ongoing selection, I have revealed most of the process in this article. The only thing I'm not disclosing is the exact details about the timing intervals (it's not just 12 months). The only inputs the system requires are the monthly prices of all the indices. At the end of each month, the system compares relative momentum over the specific intervals across all the indices and simply picks the strongest sector and the strongest factor.
The same applies for the rare occasions when the system switches to cash. Again this is entirely based on monthly price levels of the past 12 months. Notably, it hasn't been allocated to cash since early 2009, so it only happens during extended declines with high mathematical probability of continued downtrend.
Although I'm not revealing the timing details of the system, subscribers receive the output (the trading signals) each month before the opening of the first trading day. 😊
Great article mate. I subscribed because I was kind of coming to the same conclusion about sector rotation. I've created my own database with eod data and charting software (With the use of some available libraries). Witnessing the 2025/26 sector rotation out of tech into commodities had me thinking and I was going to code up a page to show returns of different sectors against each other so I could visualize when one kicks on. I was also going to pit all known ETF's against each other which would show the sectors anyway.
I'm interested to read more on "factors" which I'll do tonight. I didn't know these were a thing and covered by ETF's.
Looking forward to reading more of your stuff. Thanks for sharing!
Thanks for your comment! Sounds like you were already moving in the same direction. This has been a true game changer for my returns.
I definitely recommend studying factors. These are the historical premiums identified by academic research with well-documented outperformance over decades. The problem with factors is they are inherently inconsistent. That's why a rotation approach can make a huge difference.
It’s unique that your benchmark to beat was the MSCI World index.. why’d you choose it specifically?
As someone who’s working on their own system, this was profoundly eye opening. I’ve reached a point where I can identify sector performance and relative strength in certain cycles, but your ability to expand your process further by eliminating emotion, backtesting look backs, and simply buying based on relative strength at the end of a given month is so easy to understand and execute. It’s something I haven’t yet thought of myself and will now work toward, as I’m also obsessed with the data behind it.
How’d you perform your backtests on so many years of data?
I’m curious which other benchmark you would expect? I know that most US-based strategies use the S&P 500 for benchmarking, but since my strategy is global (investing in US and Europe) and I’m writing for a global audience, I think it would be wrong to compare it to a US-only index :-) MSCI World is, as far as I know, the most widely referenced global market index.
As for the backtest, I have simply downloaded all the historical price data for all sectors and factor indexes, so I can work with them independently in my own customized spreadsheets 😊
When you put it in that perspective it makes sense why you use it.
I’ve only ever thought to compare US ETFs against SPY, haven’t considering moving to a worldwide strategy. Figured if I couldn’t beat the primary US benchmark I had no business venturing further. I’ll definitely be adding it to my open items to research further.
I love what you’re doing here. Can’t wait to see more. Tbh this is one of the very few articles I’ve read start to finish on the platform so far
Great question! Depending on which country you live in and its tax rules, there can indeed be a drag from ongoing capital gains tax. Historically, however, it has been outweighed by the level of outperformance, which has averaged > 10% annually.
Great article on the power of combining factor investing with a systematic momentum overlay. It’s rare to see a strategy that effectively mitigates the decade-long underperformance periods often seen in pure factor plays.
Have you tested how sensitive the CAGR is to the specific look-back period—for instance, does using a 6-month vs. a 12-month momentum window significantly change the drawdown protection results?
Thank you! Appreciate your comment 🙏
I have tested every possible look-back period with the monthly data. The CAGR stays significantly above market level, regardless of the lookback period, but the alpha gradually declines the further I move away from the selected monthly intervals, as you would expect.
So, it seems the system would do well with most settings, but I optimized it for the most consistent outperformance based on the 2000-2020 data.
Thank you for the knowledge 👏
You can feel the years of trial and patience behind this. The discipline to stick with a system is what most people struggle with. It’s a steady approach that seems to value consistency over excitement.
Thanks for the words! 🙏 You are absolutely right.
It did take many years to reach this point.
It does require discipline to stick with a system.
And yes, my main priority was to build a system with high consistency in the returns. There are lots of trading systems available that deliver higher CAGRs but with much higher volatility. Personally I don't have the risk profile to stick with these, so I had to invent my own.
I love this! This is exactly the kind of edge I’ve been looking for 🙏 Subscribed and looking forward to follow!
When exactly are the trades supposed to be executed?
Thank you so much, I really appreciate this!
You should execute the trade after you receive the monthly trade signal in your inbox. Ideally on the first day of the month, but the sooner the better.
The whole back-test and my five years of trading the system in real life have been based on trades executed at the turn of the month or on the first trading day of the month.
Can you show precisely which ETFs were your factor ETFs and sector ETFs? And how did you know which factor or sector to switch to? You just picked the best performing one over the last twelve month window? And when did you know to switch to cash?
Hi!
Actually I have received a lot of requests for specific ETF tickers. I didn't originally include these because the availability of each ETF depends on the country you live in. But I will assemble lists of suggested ETF tickers specifically for the US and EU markets in the next article I send out! 👍
Regarding the ongoing selection, I have revealed most of the process in this article. The only thing I'm not disclosing is the exact details about the timing intervals (it's not just 12 months). The only inputs the system requires are the monthly prices of all the indices. At the end of each month, the system compares relative momentum over the specific intervals across all the indices and simply picks the strongest sector and the strongest factor.
The same applies for the rare occasions when the system switches to cash. Again this is entirely based on monthly price levels of the past 12 months. Notably, it hasn't been allocated to cash since early 2009, so it only happens during extended declines with high mathematical probability of continued downtrend.
Although I'm not revealing the timing details of the system, subscribers receive the output (the trading signals) each month before the opening of the first trading day. 😊
Intriguing read, to say the least. On which day monthly updates come out?
I’m glad you liked it! The monthly trading signal comes out before the markets open on the first trading day of each month.
Great article mate. I subscribed because I was kind of coming to the same conclusion about sector rotation. I've created my own database with eod data and charting software (With the use of some available libraries). Witnessing the 2025/26 sector rotation out of tech into commodities had me thinking and I was going to code up a page to show returns of different sectors against each other so I could visualize when one kicks on. I was also going to pit all known ETF's against each other which would show the sectors anyway.
I'm interested to read more on "factors" which I'll do tonight. I didn't know these were a thing and covered by ETF's.
Looking forward to reading more of your stuff. Thanks for sharing!
Thanks for your comment! Sounds like you were already moving in the same direction. This has been a true game changer for my returns.
I definitely recommend studying factors. These are the historical premiums identified by academic research with well-documented outperformance over decades. The problem with factors is they are inherently inconsistent. That's why a rotation approach can make a huge difference.
Yeah I'll have a read tonight, thank you!
It’s unique that your benchmark to beat was the MSCI World index.. why’d you choose it specifically?
As someone who’s working on their own system, this was profoundly eye opening. I’ve reached a point where I can identify sector performance and relative strength in certain cycles, but your ability to expand your process further by eliminating emotion, backtesting look backs, and simply buying based on relative strength at the end of a given month is so easy to understand and execute. It’s something I haven’t yet thought of myself and will now work toward, as I’m also obsessed with the data behind it.
How’d you perform your backtests on so many years of data?
Love your comments, thank you! 🙏
I’m curious which other benchmark you would expect? I know that most US-based strategies use the S&P 500 for benchmarking, but since my strategy is global (investing in US and Europe) and I’m writing for a global audience, I think it would be wrong to compare it to a US-only index :-) MSCI World is, as far as I know, the most widely referenced global market index.
As for the backtest, I have simply downloaded all the historical price data for all sectors and factor indexes, so I can work with them independently in my own customized spreadsheets 😊
When you put it in that perspective it makes sense why you use it.
I’ve only ever thought to compare US ETFs against SPY, haven’t considering moving to a worldwide strategy. Figured if I couldn’t beat the primary US benchmark I had no business venturing further. I’ll definitely be adding it to my open items to research further.
I love what you’re doing here. Can’t wait to see more. Tbh this is one of the very few articles I’ve read start to finish on the platform so far
It’s comments like these that make Substack a magical place for writers. I really appreciate it, thank you so much 🙏
Great read and interesting! Thanks for sharing! I’ll be looking forward to your monthly trade update too 👍
That’s very interesting, thank you for sharing!
How do you handle capital gains tax implications of selling and buying different ETFs each month?
Great question! Depending on which country you live in and its tax rules, there can indeed be a drag from ongoing capital gains tax. Historically, however, it has been outweighed by the level of outperformance, which has averaged > 10% annually.
UK ISA tax free 😎
Interesting approach. Combining factor investing with momentum rotation is a powerful ideaespecially when the rules remove emotion from decisions
If you have time, pls read my posts on the anatomy of market crash. Would appreciate seeing where can add to each other