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Jim Lowell edits MarketWatch's ETF Trader, an investment letter employing a momentum-based exchange-traded-fund strategy for long-term investors. Large and small stocks, proposed his Sower's Growth Portfolio. This is a diversified portfolio of exchange-traded funds. The view is that a growing economy tends to create a growing portfolio.

This portfolio is heavily equity and US focused. It is a diversified portfolio of exchange-traded funds including Big-caps ETF (DIA, IYY, ONEQ, PWC), Midcaps ETF (NYSEARCA:MDY), Small-caps ETF (NYSEARCA:IWM) and foreign ETF (NYSEARCA:EFA).

The fund selection for testing the strategy is listed below with the ETF alternatives:

US Equities

  • 10% in Diamonds Trust DIA (NYSEARCA:SPY)

  • 15% in iShares DJ U.S. Total Market IYY (VTI, DVY)

  • 7.5% in Fidelity NASDAQ Composite ONEQ (QCLN, QABA)

  • 7.5% in Power Shares Dynamic Market PWC (VTV, VUG)

  • 10% in iShares Russell 2000 IWM (IWO, IWW)

  • 15% in Mid Cap SPDR Trust MDY (IJJ, VO)

International Equities

  • 25% in iShares MSCI International EAFE EFA (VEA, EFV)

  • 10% in iShares MSCI Emerging Markets EEM (NYSEARCA:VWO)

Things to note about the portfolio:

  • 100% in equities is an aggressive portfolio

  • 65% in US equities is high in today’s market environment

  • There is no real estate (IYR, VNQ, ICF) or fixed income which would likely result in improved performance today

  • With three asset classes (US, international and emerging markets), this can be mapped against a 3 asset class SIB

We will make a comparison of the performance of this portfolio against strategic asset allocation (equally spread assets), tactical asset allocation and against 3 asset class SIB portfolios we discussed in a previous article,

The 3 asset class SIB breakdown

  • Large Blend VTSMX (ETF, VTI)

  • Foreign Large Blend VGTSX (ETF, VEU)

  • Intermediate-Term Bond VBMFX (ETF, BND)

There are a number of things to note about the comparisons:

  • The Lowell SAA and TAA were driven with a 100% in equities -- the TAA strategy will move to fixed income (cash) should the momentum drive it that way, the SAA strategy will not

  • The 3 asset SIBs are using an aggressive model portfolio that still includes some fixed income

Historical returns for different investment strategies


Summary Returns of Lowell's Portfolios

Annual Returns

1 year

3 Year

5 Year

Lowell Original

9.04

-5.38

2.25

Lowell SAA

13.14

-13.6

1.83

Lowell TAA

6.23

5.26

13.26

3 SIB SAA

7.03

-3.39

3.29

3 SIB TAA

-4.23

0.63

5.76


The results are shown above. There are a number of interesting things to note
:

  • The choice of funds, even if diversification enables reasonable returns

  • Before the downturn, the original portfolio was outperforming everything except the dynamic allocation of the original strategy

  • The strategy falls foul of the 2008/2009 downturn and tracks pretty closely with any buy and hold strategy

  • The three asset SIBs have a fixed income fund that enables slightly better performance in choppier market conditions

  • The Lowell choice of funds allows the tactical asset allocation strategy to outperform the three asset class SIB with TAA

  • The 2008/2009 downturn shows the benefits of a tactical asset allocation – even if it means moving equities to cash

Takeaways:

  • The Sower’s growth portfolio is a low maintenance portfolio that is heavily weighted towards US equities. In the long term, there is still confidence in the US economy but following this portfolio and strategy will give you some heartache
  • This portfolio was created when the sort of downturn we experienced in 2007/2008 was not envisioned -- it's hard to imagine that this portfolio would still be recommended today
  • Migrating to a dynamic strategy with the same funds provides much higher returns. Given a dynamic strategy, it would make sense to add some fixed income such as AGG, BND, SHY, CSJ rather than just cash
  • Conventional tactical asset allocation with the right number of asset classes (at least five) still provides the best performance
  • ETFs give you a good degree of choice, a good vehicle for any portfolio and with increasing track record, it’s possible to demonstrate good historical performance

Disclosure: None

Source: On Sower's Growth Portfolio