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I am cheap and hate paying commissions. It is now possible to avoid commissions as several online brokers have begun offering commission free ETF trades. Over the next week I will introduce 3 commission free ETF portfolios using tactical asset allocation to allocate funds among 10 different ETFs within each portfolio. Each portfolio will be uniquely tailored for a specific online broker and constructed of only commission free ETFs. The inspiration for the portfolios is Mebane Faber's The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets

The first portfolio is designed for TD Ameritrade clients. TD Ameritrade offers over 100 commission-free ETFs. There are some caveats - mainly that clients need to enroll in the commission-free ETF program to be eligible for free trades and ETF held less than 30 days will be assessed a short-term trading fee. However, for the purpose of this strategy transactions will only occur at the beginning of each month so, with the exception of February, the 30 day holding period should not be a concern.

I chose a 10 ETF portfolio as the model portfolio for the strategy. There is no one size fits all portfolio size, so the number of positions an investor can or should hold will depend on portfolio size. However, I believe ten ETFs provides enough diversification across multiple assets classes while also appealing to a wide range of investors. For those with limited funds, a 5 ETF portfolio such as the basic portfolio I track on a monthly basis may be more appropriate and for those with larger portfolios, a 20-25 ETF portfolio could be appropriate.

As a general rule, I prefer at least $5000 per ETF position. However, this preference has been based on the normal assumption that commissions could eat up a position if it were too small. If we are not paying commissions for any trades, then position size becomes much less important. There is still a significant drawback to too many positions - taxes. If we are constantly trading in and out of positions, gains will be taxed, potentially reducing overall gains. In addition, we need to ask ourselves if there is a marginal benefit of monitoring a commission-free 20 or 25 ETF portfolio as opposed to 10 positions. For the purpose of this strategy and portfolio, I do not believe there is a large benefit to expanding beyond 10 positions but I certainly encourage investors to find a portfolio size which matches their own criteria.

The rules for this portfolio are simple: Buy each ETF at the beginning of the month if it closed the previous month above its 10 month simple moving average. Check each month at the beginning of the month and only sell the ETF if it closed the month below its 10 month simple moving average. Keep any proceeds in cash (in other words, do not use the proceeds to purchase one of the other ETFs).

Ignore any activity that occurs within the month. For example, if the ETF closes the month above its 10 month SMA and falls below its 10 month SMA on the 8th, ignore this "noise". The positions should only be bought or sold at the beginning of the month. Again, for those looking for more in-depth analysis of this strategy I would recommend Faber's The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets.

Since we are in the middle of February, I will begin tracking this portfolio in-depth at the beginning of March with buy/sell recommendations. However, below are the 10 ETFs in the portfolio. Each ETF is assigned equal weight if a "buy" signal is generated at the beginning of the month. For ETFs with no buy signal, the funds which would have been used to purchase/hold it will sit in cash.

Please remember that none of this should be considered investment advice and this exercise is simply for entertainment/fun.

The TD Ameritrade Commission-Free Tactical Asset Allocation (TAA) Portfolio along with the February 1st above/below 10 month SMA update:


2/1/11 Above/Below 10 Mo SMA?
(NYSEARCA:DJP) iPath DJ-UBS Commodity Index TR ETN Yes
(NYSEARCA:DBC) PowerShares DB Commodity Index Tracking Yes
(NYSEARCA:RWO) SPDR Dow Jones Global Real Estate Yes
(NYSEARCA:VNQ) Vanguard REIT Index ETF Yes
(NYSEARCA:TIP) iShares Barclays TIPS Bond No
(NYSEARCA:BND) Vanguard Total Bond Market ETF No
(NYSEARCA:VWO) Vanguard Emerging Markets Stock ETF Yes
(NYSEARCA:VEU) Vanguard FTSE All-World ex-US ETF Yes
(NYSEARCA:VB) Vanguard Small Cap ETF Yes
(NYSEARCA:VTI) Vanguard Total Stock Market ETF Yes


Disclosure: No positions

Source: Creating a Commission Free ETF Portfolio