Holy Grail Portfolio Revisited: ETFs and Stocks That Form a Winning Combination

|
 |  Includes: ABT, CLX, DBC, GLD, IWM, NLY, PG, RWX, SDS, SLV, TIP, VEA, VNQ, VTI, VWO
by: Lowell Herr

Over a month ago I wrote an article on the "Holy Grail" portfolio that can be found at this site. The following combination of 11 ETFs and four individual stocks meet several requirements when using the Quantext Portfolio Planner analysis tool developed by Geoff Considine. Under current market conditions, the goal is to see the projected return for the portfolio exceed that of the S&P 500 by at least one hundred basis points. The second goal is to surpass the projected Return/Uncertainty ratio by 0.60. The following asset allocation plan meets that requirement. The third goal is to come up with a diversified portfolio where the Diversification Metric tops 40%. This portfolio comes in at 45%.

The "Holy Grail" portfolio allocates nearly equal amounts to U.S. and international equities markets, 21% to 20%. Ten percent is allocated to U.S REITs (NYSEARCA:VNQ) and 5% to international REITs (NYSEARCA:RWX). The reason 10% is devoted to gold, silver, and commodities is one of correlation. The second screen shot demonstrates the reason for what some investors may consider a rather high allocation, particularly in light of the recent performance from GLD and SLV. The correlation slide provides evidence for following this allocation.

Instead of deriving dividends from bonds, this portfolio pulls income from the two REITs, VNQ and RWX and the stock, NLY. This historical yield has been nearly 3.4%.

The most controversial holding in the "Holy Grail" portfolio is the ultra-short on the S&P 500, SDS. This is the one ETF that provides a negative correlation to all the other investments. Investors not comfortable with any type of short should simply remove this holding and reallocation or add another stock or ETF of choice.

Click to enlarge
(Click to enlarge)

The full correlation matrix table was too wide to include in this article so I cut it down to include the weighting, tickers and their portfolio correlations. Note the high correlation between all the equity ETFs (yellow background). Investments with a light blue background are considered to carry a low correlation. SDS stands all on its own as the one negatively correlated holding.



Using historical and future projections, I've developed what I call the "Delta Index" data table. With the market as high as it is, only SDS merits a clear Buy signal, as it is the only holding with a green coding in the Delta column. I explained a bit more how this table works in this Seeking Alpha article.

If the market conditions were such that the following signals were projecting a better market a few months into the future, SDS would be sold out of this portfolio.

Click to enlarge
(Click to enlarge)

If I were to make any changes in this portfolio it would be to replace CLX with a stock that has a higher projected future percentage.

Disclosure: I am long VTI, IWM, VWO, VNQ, RWX, DBC, SLV, TIP, ABT, PG, NLY, SDS. I frequently write about portfolio construction, management, and monitoring on my blog at itawealthmanagement.com