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Building A Diversified, Low-Volatility ETF Portfolio

May 08, 2018 8:23 AM ETUSMV, EFAV, ACWV, VMVFX, VDE, FAN1 Comment
Charles Bolin profile picture
Charles Bolin


  • Excel Solver is set up to build a hypothetical million-dollar portfolio to maximize volatility-adjusted returns constrained by correlation to other funds in the portfolio.
  • Correlation of each ETF to the Risk Indicator from the Investment Model is added to the ETF Ranking System and to limit investment limits in ETFs.
  • The Optimized Portfolio is not a destination. It is a journey.


I dusted "Investing With The Trend" by Gregory L. Morris off the shelf as I set up a system to build a diversified, low-volatility ETF Portfolio. Discussing investing by the stage of the business cycle, he says, "... you can use a momentum analysis and always be in the top four sectors and probably do well. Clearly, this is certainly better than buy and hold or index investing." As I skim through the book again, the quote from Jud Doherty, Stadion Money Management, "I am a firm believer in active management to add safety, not return, and that a disciplined process is critical to success." is particularly important.

Christine Benz from Morningstar says in "Assess Your Asset Allocation for Retirement" that “the mix of stocks and bonds that delivers the highest possible return with the least amount of risk over a given time frame - will be apparent only in hindsight.” She goes on to say that portfolios need to be based on investors own situation and should be reviewed periodically. Ms. Benz will be a guest speaker at the American Association of Individual Investors in Las Vegas this October.

There is some merit to using standard deviation to adjust returns for volatility as the S&P 500 (VOO) currently has a standard deviation of 10 while short-term bonds (MINT) has a standard deviation of less than 1; however, standard deviation changes with volatility. I use returns adjusted by standard deviation to influence the ETF Rank for volatility.

I use momentum, fundamentals and five analysts' ratings (such as Morningstar and Market Edge) to narrow about a thousand ETFs down to approximately 100 funds, which include most of Morningstar’s classifications. I have built the Ranking System and Portfolio Optimizer to adjust the portfolio for the Business Cycle including sector rotation.


This article was written by

Charles Bolin profile picture
I use Mutual Fund Observer MultiSearch as the primary tool to analyze and rank funds based on risk, momentum, quality, income, and consistency factors. I classify nearly 300 funds each month by investment buckets for risk and trends. I began contributing to the MFO monthly newsletter in 2019.I retired in June 2022.  I am an individual investor and retired engineer with an MBA.

Analyst’s Disclosure: I am/we are long PSL BNDX WOOD VDE COMT VMVFX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I am not a professional investor nor an economist. The information in this article should not be taken as advice. Investors should do their own research or consult with an investing professional.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (1)

Awesome article, we need more inflation to bring commodity prices back up to par.
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