We have shifted once again to the strong season of the market. Today, we will evaluate one of the more popular seasonal portfolios - switching between momentum and low volatility.

Yesterday’s report opened up the start of our update of our market seasonality studies that employ original observations from Yale Hirsch to illustrate how substantive the performance bias has been within the “seasonally strong” half of the year when compared to the "seasonally weak" period. As of the close last Friday (10/31), we ended the seasonally weak period and officially moved into the strong season of the market (November 1st - April 30th). This year, in the “seasonally weak” period the S&P 500 (SPX) produced a return of about 23%; the Dow (.DJIA) gained roughly 17% and the Nasdaq (NASD) added 36%. While some of this can be attributed to the sharp rally following the early April tariff tantrum, these returns are hardly what most would be considered a weak six months…

However, it isn’t easy to know when the market will buck a historical trend, and this is one of the reasons why we've put forth the concept of a seasonal "tilting" approach that employs factor investing. This is a way to incorporate a long-term, well-documented bias in the market, without resorting to an “all in or all out” strategy that many investors may find unpalatable. This strategy also offers an opportunity to further differentiate yourself within the wealth management space as an expert on investment factors.

Today, we will evaluate one of the more popular seasonal portfolios which combines two complementary factors, momentum and low volatility, via the Invesco Dorsey Wright Momentum ETF (PDP) and the Invesco S&P 500 Low Volatility Portfolio (SPLV). Because these two portfolios are based on two distinct factors, they tend to have different holdings and short-term outcomes. However, when put together, these strategies tend to have a complementary relationship, producing solid long-term returns with a relatively low correlation of excess returns. This combination makes for an attractive US "core" equity solution and a starting point for a seasonal "tilting" strategy.

The basis for our strategy lies in the historical bias that having exposure to the market during the "seasonally strong" six months is a good thing and having exposure to the market during the "seasonally weak" period has caused more headaches than benefits. Although, the common wisdom does not always apply. In fact, momentum has outperformed low volatility during the seasonally weak period for the past six years straight… most recently seeing momentum narrowly eke out a ~half percentage point gain over low volatility in 2024.

The strength of the US equity market over the last six months was notable, but there were a couple of concerning points – serving as a reminder as to why a tilting approach is preferable to simply following the “sell in May and go away” adage. Not to mention that the idea of being completely out of the market for an entire six months every single year can lead to some uncomfortable conversations with clients.

That said, this strategy looks to overweight the strongest areas of the market during the "seasonally strong" period, and shift the overweight exposure to the more defensive, lower volatility names during the "seasonally weak" period. Specifically, this portfolio holds a 70% allocation to momentum and a 30% allocation to low volatility from November 1st - April 30th, and during the "seasonally weak" six months (May 1st through October 31st), the portfolio switches to 30% momentum and 70% low volatility.

As you can see in the table above, before 2020 SPLV often yielded better returns during the "seasonally weak" six months than momentum. However, SPLV has lagged the return of momentum during the "seasonally strong" six months, cumulatively up about +249% vs. momentum’s gain of +857%. While neither switching strategy’s point to point returns keep up with a simple buy and hold strategy of momentum over our lookback period, there is a noticeable difference between the success of any strategy and their respective performance during the seasonally strong/weak points in the year.

The table below shows the annual returns for each of the strategies. Notice that the seasonal switching strategy has shown promising results compared to a simple 50/50 split between momentum and low volatility, and the S&P 500 in some instances. The switching strategy has also outperformed low volatility but has trailed momentum over our study period. Remember, the point of any strategy won’t be (and shouldn’t be) to outperform every single year, but to create an all-weather portfolio that is systematic and defendable across various market environments.

Legend:

Seasonal Switching for PDP / SPLV - This portfolio is 70% PDP and 30% SPLV during the "seasonally strong" periods and switches to 30% PDP and 70% SPLV during the "seasonally weak" period.

S&P 500 Index – (SPX)

50 / 50 PDP & SPLV – This portfolio is 50% PDP and 50% SPLV, rebalanced at the end of every year.

Invesco Dorsey Wright Momentum ETF (PDP): https://www.invesco.com/us/financial-products/etfs/product-detail?audienceType=Investor&ticker=PDP

Invesco S&P Low Volatility ETF – (SPLV): https://www.invesco.com/us/financial-products/etfs/product-detail?audienceType=Investor&ticker=SPLV

Disclosures:

Performance prior to each funds’ inception date are back-tested and based upon the underlying index shown below:

Inception date of SPLV is 5/5/2011, prior to that all testing is based upon the S&P 500 Low Volatility Index.

Returns for all models and benchmarks are Pure Price Returns, excluding dividends and transaction costs.  Returns within the model portfolios are a result of back-testing.  Back-tested performance is hypothetical and is provided for informational purposes to illustrate the effects of the strategy during a specific period. The hypothetical returns have been developed and tested by NDW, but have not been verified by any third party and are unaudited.  Back-testing performance differs from actual performance because it is achieved through retroactive application of a model investment methodology designed with the benefit of hindsight.

Model performance data (both back-tested and live) does not represent the impact of material economic and market factors might have on an investment advisor’s decision-making process if the advisor were actually managing client money.  Investors cannot invest directly in an index.  Indexes have no fees.  Past performance is not indicative of future results.  Potential for profits is accompanied by possibility of loss.

The relative strength strategy is NOT a guarantee.  There may be times where all investments and strategies are unfavorable and depreciate in value.  Relative Strength is a measure of price momentum based on historical price activity.  Relative Strength is not predictive and there is no assurance that forecasts based on relative strength can be relied upon