ETFReplay Portfolio For October

Includes: EFA, HYG, RWX, SHY, 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 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 9/30/13 are below:

VTI Vanguard MSCI Total U.S. Stock Market
SHY Barclays Low Duration Treasury
HYG iShares iBoxx High-Yield Corp Bond
RWX SPDR DJ International Real Estate

Since cash is the third highest rated ETF, anything rated below it does not qualify for purchase. This is still a somewhat defensive allocation, as a result of recent volatility and negative performance in a variety of equity, commodity and bond markets.

For October the portfolio is purchasing VTI and EFA, and will keep 50% 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.

The strategy's performance since inception is below, as is comparative performance of the SPDR S&P 500 ETF (NYSEARCA:SPY), iShares Growth Allocation (NYSEARCA:AOR), and the Permanent Portfolio (MUTF:PRPFX):

Disclosure: No positions