ETFReplay Portfolio: April 2013

Includes: EFA, HYG, LQD, RWX, VNQ, VTI
by: Scott's Investments

Among the more popular portfolios on Scott's Investments has been the Portfolio. The strategy has been revised and improved for 2013 in order to make it simpler to follow.

I previously detailed here and here how an investor can use to screen for best performing ETFs based on momentum and volatility. I select only the top four ETFs out of a static basket of ETFs and re-balance the portfolio monthly. Previously, the static basket of ETFs was 25. This number of ETFs creates a high degree of turnover and also creates cross-over among ETFs that have a high correlations. For example, if you are only purchasing four ETFs each month and two or three of the ETFs are highly correlated, there is little benefit in holding more than one of the ETFs.

For 2013, the static basket of ETFs was reduced to 15. From this basket of 15, the top four will be selected each month. The portfolio will be re-balanced at the beginning of each month. When a holding drops out of the top five ETFs it will be sold and replaced with the next highest ranked ETF. I added the top five requirement in order to further limit turnover. ETFs will be ranked on a combination of their 6 month returns, 3 month returns, and 3 month volatility (lower volatility receives a higher ranking).

In addition, ETFs must be ranked above the cash ETF SHY in order to be included in the portfolio, similar to the absolute momentum strategy I profiled here. This modification could help reduce drawdowns during periods of high volatility and/or negative market conditions (see 2008-2009).

The top 5 ranked ETFs as of 3/28/13 are below:

  1. VTI - Vanguard MSCI Total U.S. Stock Market

  2. HYG - iShares iBoxx High-Yield Corp Bond

  3. RWX - SPDR DJ International Real Estate

  4. VNQ - Vanguard MSCI U.S. REIT

  5. LQD - iShares iBoxx Invest Grade Bond

For April the position iniShares MSCI EAFE (NYSEARCA:EFA) was closed for no gain/loss (excluding dividends). It was replaced by HYG, which is now ranked second on the list.

The four current positions are below:

Position Purchase Price Purchase Date Percentage Gain/Loss Excluding Dividends
RWX 40.74 10/31/2012 5.57%
HYG 94.35 3/28/2013 0.00%
VTI 78.24 2/28/2013 3.39%
VNQ 69.09 2/28/2013 2.08%

The portfolio is currently lagging the S&P 500 (via the SPY ETF) on a nominal basis since inception. However, you can see the potential benefit during periods of equity pullbacks (of which we have had very few the past couple of years!) when the portfolio outperformed in 2011:

Disclosure: None