A Momentum Strategy Using Leverage and Monthly Rotations
Hello all, I'm presenting the results of a simple weighted momentum strategy but one that uses leverage to amplify results. I'd love your feedback and thoughts on the viability of the strategy.
I won't go into the theory of momentum investing and only mention that momentum-based strategies seem to be the only set of strategies that consistently beat the market.
The strategy itself is simple: I construct a weighted score based on past momentum (e.g. 1 month, 3, month, etc.) with more recent momentums weighted higher. I then select the top 5 stocks and rotate monthly (buy at month's open, sell at month's close).
I select stocks using the S&P 100 universe. To minimize survivorship bias, I pulled constituents from the year previous to the test year using the wayback machine; for example, when looking at 2025, I'm using constituents as December 2024.
I then use 2X leverage on my returns. I also assume 0.2% transaction cost. I also calculate the tax burden. In Canada, half of one's capital gains are taxable; so I apply an effective tax rate of 25% on that 50%, which means about 12.5%/year (in years where there are losses taxes = 0) and this is applied at the end of the year. This is meant to be a rough estimate - taxes could be higher or lower depending on the year. Additionally you can claim losses from previous years which would lower the tax burden some years.
My results are as follow:
Strategy Metrics
CAGR (Gross): 28.6%
CAGR (After Tax): 25.0%
SPY CAGR: 13.1%
Total Tax Paid (Cumulative): 45.4%
Average Annual Tax Drag: 4.13%
Alpha (annualized): 12.7%
Beta: 1.47
Sharpe Ratio: 0.95
Max Drawdown: -38.6%
Yearly Returns
| Year | Gross Return | SPY Return | Tax Paid | Net Return | Strategy NAV | SPY NAV |
|---|---|---|---|---|---|---|
| 2016 | 10.90% | 9.64% | 1.36% | 9.55% | 1.11x | 1.10x |
| 2017 | 58.90% | 19.40% | 7.36% | 51.50% | 1.76x | 1.17x |
| 2018 | 21.00% | -6.35% | 2.62% | 18.30% | 2.13x | 1.10x |
| 2019 | 30.00% | 28.80% | 3.75% | 26.20% | 2.77x | 1.42x |
| 2020 | 33.90% | 16.20% | 4.24% | 29.70% | 3.71x | 1.65x |
| 2021 | 29.30% | 27.00% | 3.66% | 25.60% | 4.80x | 2.10x |
| 2022 | -13.70% | -19.50% | 0.00% | -13.70% | 4.14x | 1.69x |
| 2023 | 81.80% | 24.30% | 10.20% | 71.60% | 7.53x | 2.10x |
| 2024 | 39.60% | 23.30% | 4.94% | 34.60% | 10.50x | 2.59x |
| 2025 | 58.20% | 16.40% | 7.28% | 50.90% | 16.60x | 3.01x |
| 2026 | -3.93% | 7.60% | 0.00% | -3.93% | 16.00x | 3.24x |
Note that max drawdown refers to month-to-month drawdowns, so it's likely that absolute day-to-day drawdown is lower.
I would love some feedback and thoughts about whether this strategy is actually "actionable".