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This month's ETFReplay.com Relative Strength ETF Portfolio has been updated at Scott's Investments, and includes turnover in three positions. As I mentioned in yesterday's Basic ETF post, you will see some changes to how the portfolios are tracked on the site. There will be less transaction history posted due to the limitations of Google Docs, the clutter created with too many details on the spreadsheets, and the amount of time required to manually track dividends and performance. I will be using a third-party software platform to perform performance calculations and post the results monthly.

Strategy Background

I previously detailed how an investor can use ETFReplay.com to screen for the 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. Readers often get confused by this point; I select only the top ETFs out of this static basket of 25 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) and 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." The top 2 ETFs in the 6/3/3 ranking and top 2 in the 3/20/20 ranking are purchased each month. When there are duplicates in the top 2, I look to the third ranked ETF in the 3/20/20 and, if necessary, the third ranked ETF in the 6/3/3. The strategy always holds 4 ETFs.

I track this strategy as a public portfolio on Scott's Investments. As of the close December 30th the hypothetical portfolio was up 7.5% including dividends (returns exclude commissions and taxes and all trades are hypothetical so real results will differ). For some backtests on these strategies, please see this post from mid-September.

2012 Updates

For December 30, the strategy sold its positions in Barclays Low Duration Treasury (SHY), iShares Barclays 7-10 Yr Treasury (IEF), and U.S. Utilities Sector SPDR (XLU). The proceeds were used to purchase PowerShares Emerging Mkts Bond (PCY), iShares iBoxx High-Yield Corp Bond (HYG), and Vanguard MSCI U.S. REIT (VNQ).

Minor fluctuations in rankings may not always justify selling positions each month. For example, if one ETF drops from the second highest rated to the third or fourth highest rated, it may not warrant selling the position. An investor could only sell a position when it drops out of the top 4 or 5 at the end of the month. This type of modification could be used when someone is looking to limit turnover; however, I think it is important to have whatever rule you prefer to use in place prior to making the investment decision in order to avoid discretionary or emotional decision making. Below are the full rankings of both the 6/3/3 and 3/20/20 strategies, in order from top to bottom ranked:

3 month/20 day/20 day
Symbol Name
HYG iSharesiBoxxHigh-YieldCorpBond(4-5yr)
PCY PowerSharesEmergingMktsBond(7-8yr)
VNQ VanguardMSCIU.S.REIT
XLU U.S.UtilitiesSectorSPDR
LQD iSharesiBoxxInvestGradeBond(7-8yr)
SPY SPDRS&P500Index
TIP iSharesBarclaysTIPS(4-6yr)
IEF iSharesBarclays7-10YrTreasury(7-8yr)
VBR VanguardMSCIU.S.SmallCapValue
DBV PowerShDBG10CurrencyHarvest
PFF iSharesS&PUSPreferredStockIndex
TLT iSharesBarclaysLong-TermTreasury(15yr)
SHY BarclaysLowDurationTreasury(2-yr)
WIP SPDRInt'lGovtInfl-ProtectBond(9-10yr)
XLE U.S.EnergySectorSPDR
DBC PowerSharesDBCommodityIndex
BWX SPDRBarcapGlobalEx-U.S.Bond(6-7yr)
EFA iSharesMSCIEAFEIndex
EEM iSharesMSCIEmergingMarkets
DBA PowerSharesDBAgriculturalCommodities
SCZ iSharesMSCIEAFESmallCapIndex
LSC ElementsS&PC.T.I.
DBB PowerSharesDBBaseMetals
RWX SPDRDJInternationalRealEstate
GLD SPDRGoldShares

6 months/3 months/3 months
Symbol Name
TIP iSharesBarclaysTIPS(4-6yr)
PCY PowerSharesEmergingMktsBond(7-8yr)
LQD iSharesiBoxxInvestGradeBond(7-8yr)
XLU U.S.UtilitiesSectorSPDR
IEF iSharesBarclays7-10YrTreasury(7-8yr)
HYG iSharesiBoxxHigh-YieldCorpBond(4-5yr)
TLT iSharesBarclaysLong-TermTreasury(15yr)
SHY BarclaysLowDurationTreasury(2-yr)
DBV PowerShDBG10CurrencyHarvest
VNQ VanguardMSCIU.S.REIT
SPY SPDRS&P500Index
BWX SPDRBarcapGlobalEx-U.S.Bond(6-7yr)
WIP SPDRInt'lGovtInfl-ProtectBond(9-10yr)
PFF iSharesS&PUSPreferredStockIndex
DBC PowerSharesDBCommodityIndex
XLE U.S.EnergySectorSPDR
GLD SPDRGoldShares
VBR VanguardMSCIU.S.SmallCapValue
DBA PowerSharesDBAgriculturalCommodities
EFA iSharesMSCIEAFEIndex
EEM iSharesMSCIEmergingMarkets
LSC ElementsS&PC.T.I.
SCZ iSharesMSCIEAFESmallCapIndex
RWX SPDRDJInternationalRealEstate
DBB PowerSharesDBBaseMetals

Performance data and current positions are listed below (click to enlarge):



Disclosure: No current positions in stocks mentioned.

Disclaimer: Please note that Scott's Investments and its author is not a financial adviser. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of Scott's Investments.

Source: January ETFReplay.com Portfolio Rankings