One of my most-followed portfolios is the ETF Replay Portfolio, or Relative Strength Portfolio, which I typically update around the first of the month. However, as I have previously noted, the portfolio can be updated or rebalanced at any point.
The strategy buys the top two ranked ETFs based on the weighting of the six- and three-month returns and three-month volatility (what I call the "6/3/3" strategy) as well as the top two ranked ETFs based on the weighting of the three-month and 20-day returns and 20-day volatility ("3/20/20"). If there are duplicates in the top two, then the strategy purchases the third-ranked ETF in the 3/20/20 strategy and, if necessary, the third ranked in the 6/3/3 strategy. In other words, the portfolio always holds four ETFs.
At the beginning of April, the portfolio called for the following holdings:
- XLE -- U.S. Energy Sector SPDR
- DBC -- PowerShares DB Commodity Index
- WIP -- SPDR Int'l Govt Infl-Protect Bond (9-10yr)
- LSC -- Elements S&P C.T.I.
Rebalancing after the close on April 15 would result in the following holdings:
- DBV -- PowerSh DB G10 Currency Harvest
Three of the four ETFs remain from the beginning of the month. DBV, an ETF which seeks to invest in relatively higher yielding currencies and shorting those currencies with relatively lower yields, replaced XLE.
This current update exemplifies part of my goal in creating the list of 25 ETFs: I wanted to create a diverse list that included asset classes and strategies many investors may overlook. The mid-month update includes a commodity, currency, international inflation-protected bond, and a long/short commodity trends ETF. Not your typical portfolio.
Diversity of choice does not guarantee success but, in my opinion, it increases the likelihood of identifying and potentially profiting from positive momentum. The more asset classes from which one is searching for momentum and relative strength, the more likely an investor is to find a "bull market" somewhere.
In 2008, many asset classes suffered as the world teetered on the brink of a financial meltdown. However, US treasuries and a limited number of alternative asset classes were able to weather the storm. Those investors who included short- and long-term treasuries in their selection process may have avoided some significant portfolio drawdowns.
As an example, below is a graphical representation using ETFReplay.com to test the 6/3/3 strategy from January 2008-December 2009. The strategy bought the top three ranked ETFs out of the 25 eligible ETFs in my ETFReplay.com portfolio. As you can see, while SPY suffered a serious drawdown in 2008, a relative strength strategy avoided the same drawdown, remaining invested largely in cash and treasuries:
[Click all to enlarge]
Disclosure: No positions