Among the more popular portfolios on Scott’s Investments has been the ETFReplay.com 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 ETFReplay.com to screen for best performing ETFs based on momentum and volatility. I select only the top 4 ETFs out of a static basket of ETFs and re-balance the portfolio monthly.
For 2013 the static basket of ETFs was reduced from 25 to 15. From this basket of 15, the top 4 are purchased each month. The portfolio will be re-balanced at the beginning of each month. When a holding drops out of the top 5 ETFs it will be sold and replaced with the next highest ranked ETF. I added the top 5 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), but it could also reduce total returns by allocating to cash in lieu of an asset class.
The top 5 ranked ETFs as of 8/30/13 are below:
|SHY||Barclays Low Duration Treasury|
|VTI||Vanguard MSCI Total U.S. Stock Market|
|DBC||PowerShares DB Commodity Index|
|HYG||iShares iBoxx High-Yield Corp Bond|
|EFA||iShares MSCI EAFE|
This is little changed compared to last two months. Since cash is the highest rated ETF, anything rated below it does not qualify for purchase. This is a defensive allocation, as a result of recent volatility and negative performance in a variety of equity, commodity and bond markets.
For September the portfolio is selling its only current position, VTI, for a gain of 8.35% and holding the entire portfolio in cash. A more aggressive approach would disregard the cash filter. However, the objective of the portfolio is balance risk and reward while reducing drawdowns.