This month’s ETFReplay.com Relative Strength ETF Portfolio has been updated at my site and includes turnover in two positions.
I previously detailed here and here how an investor can use the site 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. 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 my site. As of the close February 29th the hypothetical portfolio was up 11.09% since inception on January 1st 2011. Returns include dividends but exclude commissions and taxes and all trades are hypothetical so real results will differ.
For February 29th the strategy sold its positions in IEF (iShares Barclays 7-10 Yr Treasury) and TIP (iShares Barclays TIPS). The proceeds were used to purchase SPY (S&P 500 SPDR) and SCZ (iShares MSCI EAFE Small Cap Index). The portfolio also continues to hold PFF (iShares S&P US Preferred Stock Index ) and VBR (Vanguard MSCI U.S. Small Cap Value).
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.
In January I made some changes in the online portfolio tracking. 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. Instead, I will be using a third-party software platform for performance calculations and post the results monthly. Below is a performance graph of the portfolio (green) versus SPY (SPDR S&P 500 ETF) in purple from the portfolio’s inception until February 29th, 2012:
Below are the full rankings of both the 6/3/3 and 3/20/20 strategies, in order from top to bottom ranked, Interestingly, Gold (GLD) is the bottom ranked ETF in both categories:
| 6mo/3mo/3mo | |
| Symbols | Name |
| SPY | SPDR S&P 500 Index |
| VBR | Vanguard MSCI U.S. SmallCap Value |
| HYG | iShares iBoxx High-Yield Corp Bond (4-5yr) |
| LQD | iShares iBoxx Invest Grade Bond (7-8yr) |
| VNQ | Vanguard MSCI U.S. REIT |
| PFF | iShares S&P US Preferred Stock Index |
| XLE | U.S. Energy Sector SPDR |
| EEM | iShares MSCI Emerging Markets |
| DBV | PowerSh DB G10 Currency Harvest |
| TIP | iShares Barclays TIPS (4-8yr) |
| SCZ | iShares MSCI EAFE Small Cap Index |
| PCY | PowerShares Emerging Mkts Bond (7-9yr) |
| TLT | iShares Barclays Long-Term Trsry (15-17yr) |
| XLU | U.S. Utilities Sector SPDR |
| EFA | iShares MSCI EAFE Index |
| SHY | Barclays Low Duration Treasury (2-yr) |
| IEF | iShares Barclays 7-10 Yr Treasury (7-8yr) |
| WIP | SPDR Int’l Govt Infl-Protect Bond (9-10yr) |
| RWX | SPDR DJ International Real Estate |
| BWX | SPDR Barcap Global Ex-U.S. Bond (6-7yr) |
| DBC | PowerShares DB Commodity Index |
| DBA | PowerShares DB Agricultural Commodities |
| DBB | PowerShares DB Base Metals |
| LSC | Elements S&P C.T.I. |
| GLD | SPDR Gold Shares |
| 3mo/20day/20day | |
| Symbols | Name |
| SCZ | iShares MSCI EAFE Small Cap Index |
| PFF | iShares S&P US Preferred Stock Index |
| SPY | SPDR S&P 500 Index |
| XLE | U.S. Energy Sector SPDR |
| EEM | iShares MSCI Emerging Markets |
| HYG | iShares iBoxx High-Yield Corp Bond (4-5yr) |
| DBV | PowerSh DB G10 Currency Harvest |
| RWX | SPDR DJ International Real Estate |
| PCY | PowerShares Emerging Mkts Bond (7-9yr) |
| DBC | PowerShares DB Commodity Index |
| EFA | iShares MSCI EAFE Index |
| VBR | Vanguard MSCI U.S. SmallCap Value |
| LQD | iShares iBoxx Invest Grade Bond (7-8yr) |
| WIP | SPDR Int’l Govt Infl-Protect Bond (9-10yr) |
| VNQ | Vanguard MSCI U.S. REIT |
| BWX | SPDR Barcap Global Ex-U.S. Bond (6-7yr) |
| SHY | Barclays Low Duration Treasury (2-yr) |
| XLU | U.S. Utilities Sector SPDR |
| DBB | PowerShares DB Base Metals |
| DBA | PowerShares DB Agricultural Commodities |
| TIP | iShares Barclays TIPS (4-8yr) |
| IEF | iShares Barclays 7-10 Yr Treasury (7-8yr) |
| LSC | Elements S&P C.T.I. |
| TLT | iShares Barclays Long-Term Trsry (15-17yr) |
| GLD | SPDR Gold Shares |
Disclosure: None
