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This month's ETFReplay.com Relative Strength ETF Portfolio has some very interesting changes. The entire portfolio is turning over, all 4 positions from last month are being sold in favor of 4 new ETFs.

Some, including myself, may initially feel uncomfortable purchasing long-term treasuries. However, as I stated in the Basic ETF Portfolio update, "commitment and discipline to a strategy is critical once you have decided a strategy is right for you". In addition, long-term treasuries have shown relative strength in recent weeks and if interest rates stay low in the short-term, long-term treasuries could continue to rally.

This month's portfolio also shows a shift from riskier assets and those that respond positively to inflation, such as commodities, and into "safety" assets like treasuries and utilities. Keep in mind that these signals were generated at the end of May, before today's significant market decline.

Strategy Background

I previously detailed here and here how an investor can use ETFReplay.com to screen for best performing ETFs based on momentum and volatility. I originally created a portfolio of 22 ETFs and then expanded it to 25 ETFs which I believe represent a diverse basket of ETFs.
The buy/sell strategy for the portfolio is simple: purchase the top ETFs based on a combination of their 6 month returns, 3 month returns, and 3 month volatility (lower volatility receives a higher ranking). I also track the performance of a strategy which combines the average of the 3 month return, 20 day return, and 20 day volatility. I refer to these two different sets as "6/3/3" and "3/20/20." For some backtests on these strategies please see my previous posts or August's list.

I track this strategy as a public portfolio on Scott's Investments. As of the close June 1st, the hypothetical portfolio is up 7.62% including dividends (returns exclude commissions and taxes and all trades are hypothetical so real results will differ).

June Updates

As of the close on May 31st, the top 2 ETFs in the basket of 25 for the 6/3/3 strategy were:

  • VNQ - Vanguard MSCI U.S. REIT
  • XLU - U.S. Utilities Sector SPDR

The top 3 ETFs in the basket of 25 for the 3/20/20 strategy were:

  • XLU - U.S. Utilities Sector SPDR
  • PCY - PowerShares Emerging Mkts Bond (7-8yr)
  • TLT - iShares Barclays Long-Term Treasury (15yr)

The strategy is to purchase the top 2 ranked ETFs in the 6/3/3 and 3/20/20 but to not purchase duplicates and always hold 4 ETFs. Therefore, since XLU is a top ranked ETF on both lists we look to the third ranked ETF in the 3/20/20 strategy to fill the fourth ETF position. In this case that ETF is TLT.

Therefore, the strategy for June is selling:

  • WIP SPDR Int'l Govt Infl-Protect Bond (9-10yr)
  • LSC Elements S&P C.T.I.
  • GLD SPDR Gold Shares
  • DBC PowerShares DB Commodity Index

The proceeds are used to purchase:

  • XLU U.S. Utilities Sector SPDR
  • VNQ Vanguard MSCI U.S. REIT
  • PCY PowerShares Emerging Mkts Bond (7-8yr)
  • TLT iShares Barclays Long-Term Treasury (15yr)
Source: Relative Strength ETF Portfolio for June: Exiting Commodities