The Ivy Portfolios are well known to Seeking Alpha readers, particularly the portfolio that includes 10 asset classes. In the following analysis I build on the Ivy 10 with a few modifications. 1) I substitute VNQI for RWX as it is a better performer in the international real estate space over the past few years. SHY is added to the portfolio as it is used as a momentum cutoff ETF. The use of SHY is explained in Momentum Model - Part 1 and Momentum Model - Part 2.
The Ivy 10 Portfolio begins with equal percentages (10%) assigned to each asset class. In the following analysis I begin with the original Ivy 10, but then optimize the portfolio as well as rank the securities based on three and six month performance.
ETF Rankings: Using SHY as the performance cutoff, four asset classes are currently outperforming this treasury ETF. They are: VB, VTI, VEU, and VNQI. The first two are U.S. Equity ETFs, VEU is a developed international security, and VNQI represents international REITs.
The performance is based on three and six month performance as well as a volatility calculation. Note that each of these ETFs are priced above various Exponential Moving Averages (EMAs) including the "Golden Cross," identified under the X/O column. This column is positive if the faster moving 13-Day EMA is priced above the slower moving 49-Day EMA. All have positive absolute momentum percentages.
Asset classes represented by ETFs that are under performing SHY are not part of the portfolio. One exception might be made for VWO as it has such a high relative momentum percentage. This is a personal judgment call for the money manager.
Buy-Hold-Sell Recommendations: Regardless of the optimizer recommendations, shares of ETFs performing below SHY are sold. As mentioned above, the one exception may be VWO.
This particular portfolio is valued a little below $70,000 and $3,000 is held in cash for reinvestment. More cash is forthcoming when under performing ETFs are sold, but for now the focus is on the better performing ETFs and the optimizer recommendations.
There are four basic rules to follow.
- If the optimizer calls for additional shares and the momentum is positive, buy the recommended shares. This calls for purchasing 305 shares of VTI and 6 shares of VB. Obviously, there is not sufficient cash to carry out this plan without selling off underperforming ETFs.
- If the optimizer calls for additional shares and the momentum is negative, do nothing. This rule does not apply to any of the four asset classes as all have a positive momentum.
- If the optimizer calls for fewer shares and the momentum is positive, do nothing. This is the situation with VEU and VNQI. Therefore, no changes will occur with these two ETFs.
- If the optimizer calls for fewer shares and the momentum is negative, sell the recommended shares. Again, we have no ETFs outperforming SHY that fit this situation.
This momentum model is designed to increase the Return/Risk ratio. Results from this approach, while not identical in all aspects, produced positive results when tested from late June 2007 through late June 2013. Positive is defined as outperforming the VTSMX Total Market Index Fund. In that test 18 ETFs were used instead of the simpler portfolio shown in this example. My preference is to use a few more ETFs, but the Ivy 10 provides enough low correlated asset classes to be a winning combination.
Disclosure: I am long VTI, VNQ, VEU, TLT, DBC, SHY, GSG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.