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ETFReplay.com Portfolio for October

Monday, October 1, 2012 6:30

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This month’s ETFReplay.com Relative Strength ETF Portfolio has been updated at Scott’s Investments and includes turnover in three out of four positions.

I previously detailed here and here how an investor can use ETFReplay.com to screen for best performing ETFs based on momentum and volatility. I select only the top ETFs out of a static basket of 25 ETFs and re-balance the portfolio monthly.

The buy/sell strategy for the portfolio is simple: purchase the top ETFs based on a combination of their 6 month returns, 3 month returns, and 3 month volatility (lower volatility receives a higher ranking) and the average of the 3 month return, 20 day return, and 20 day volatility. I refer to these two different sets as “6/3/3″ and “3/20/20″. The top 2 ETFs in the 6/3/3 ranking and top 2 in the 3/20/20 ranking are purchased each month. When there are duplicates in the top 2, I look to the third ranked ETF in the 3/20/20 and, if necessary, the third ranked ETF in the 6/3/3. The strategy always holds 4 ETFs.

I track this strategy as a public portfolio on Scott’s Investments. As of the close September 28th the hypothetical portfolio was up 13.13%, since inception on January 1st, 2011. Returns include dividends but exclude commissions and taxes and all trades are hypothetical so real results will differ. For some backtests on these strategies please see a recent post here.

For September 28th the strategy sold its positions in Vanguard MSCI U.S. REIT (VNQ) at a loss of 2.64%,Vanguard MSCI U.S. SmallCap Value (VBR) at a gain of 2.83% and PowerShares DB Commodity Index (DBC) at a loss of .38% (individual ETF returns exclude dividends).

Proceeds were used to purchase iShares iBoxx Invest Grade Bond (LQD), SPDR Gold Shares (GLD), and iShares MSCI EAFE Small Cap Index (SCZ). The portfolio also continues to hold its position in the PowerShares Emerging Markets Bond (PCY) .

Top 50 Trending Stocks

Minor fluctuations in rankings may not always justify selling positions each month. For example, if one ETF drops from the second highest rated to the third or fourth highest rated, it may not warrant selling the position. An investor could only sell a position when it drops out of the top 4 or 5 at the end of the month. This type of modification could be used when someone is looking to limit turnover; however, I think it is important to have whatever rule you prefer to use in place prior to making the investment decision in order to avoid discretionary or emotional decision making.

Below are the top 6 ranked ETFs for this month, using both the 6/3/3 and 3/20/20 strategy:

6mo/3mo/3mo
PCY PowerShares Emerging Mkts Bond
LQD iShares iBoxx Invest Grade Bond
GLD SPDR Gold Shares
RWX SPDR DJ International Real Estate
PFF iShares S&P US Preferred Stock Index
IEF iShares Barclays 7-10 Yr Treasury

3mo/20day/20day
PCY PowerShares Emerging Mkts Bond
GLD SPDR Gold Shares
SCZ iShares MSCI EAFE Small Cap Index
XLE U.S. Energy Sector SPDR
DBB PowerShares DB Base Metals
RWX SPDR DJ International Real Estate

Below is a performance graph of the portfolio (green) versus SPY (SPDR S&P 500 ETF) and AOR (S&P Growth Allocation) from the portfolio’s inception until September 28th, 2012. Total returns are similar but a significant drawdown was avoided in 2011:

Follow Scott’s Investments on Twitter: http://twitter.com/#!/scottsinvest

2012-10-01 06:20:37

Source: http://www.scottsinvestments.com/2012/10/01/etfreplay-com-portfolio-for-october/

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