Seeking Alpha

Building An ETF Portfolio From Analyst Consensus

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Includes: AAAU, AGZ, AOM, AOR, BAR, BSCN, DBEF, DBP, DGRO, DLN, FDL, FHLC, FREL, FTEC, GDX, GDXJ, GLD, GLDM, IAU, IGIB, LGLV, MOAT, OUNZ, PALL, QUAL, QUS, RING, SGDM, SGOL, SPIB, SPLV, SPTI, VCSH, VWELX, VWIAX, XLP
by: Charles Bolin
Charles Bolin
Medium-term horizon, macro, portfolio strategy, ETF investing
Summary

Schwab and Fidelity ETF Screens were used to select the highest rated funds from Market Edge, Morningstar, Ned Davis, XTF, FactSet.

The Funds with the highest MFO Rating from Mutual Fund Observer were selected.

The Funds included in this article had the most high ratings and were selected based on my Ranking System of Risk, Risk Adjusted Returns, Momentum, Quality, and Income factors.

Portfolio Visualizer was used to create two portfolios that maximized return for given a volatility since June 2018.

Introduction

I screened over 700 funds that had high ratings by Market Edge (Long), Morningstar (5), FactSet (NYSE:A), Ned Davis (>=4), XTF (>=9) and Mutual Fund Observer (Rating = 5) and met other criteria such as being at least five years old and having greater than $100M in assets. I summarized these by number of entities rating them highly, Lipper Category and my own Rating based on Risk, Risk Adjusted Returns, Momentum, Income, and Quality.

I then used Portfolio Visualizer to create a portfolio of funds to maximize return for the past 18 months for a volatility of 5 (similar to the Vanguard Wellesley Fund (VWIAX) and 8.5 (similar to the Vanguard Wellington Fund (VWELX)).

Fund Universe

Chart #1 is the Efficient Frontier for the funds with the most of high ratings. The link to Portfolio Visualizer for all of the Top Funds is here.

Chart #1: Efficient Frontier of Top Rated FundsTop Analyst Funds

Source: Created by the Author using Portfolio Visualizer

Highest Rated Funds

The following funds were the only ones rated by at least five of the entities and also had a high rank in my Rating System.

Table #1: Most Highly Rated Funds

DGRO iShares Core Dividend Growth Equity Income
FDL First Trust Morningstar Div Leaders Equity Income
FHLC Fidelity® MSCI Health Care Index Health Biotechnology
DBEF Xtrackers MSCI EAFE Hedged Equity International Multi-Cap Core
QUAL iShares Edge MSCI USA Quality Factor Large-Cap Core
DLN WisdomTree U.S. LargeCap Div Fund Large-Cap Value

January Model Portfolio - Portfolio Visualizer

Portfolio Visualizer was used to select funds and assign allocations that maximized returns for a given volatility. The Portfolio Visualizer Backtest Asset Allocation link for a portfolio that "Maximizes Return @ 5% Volatility (approximately 40% equities) and a portfolio that "Maximizes Return @ 8.5% Volatility (approximately 60% equities) is shown compared to the iShares Moderate (approximately 40% equities) and Growth Allocation (approximately 60% equities) ETF Portfolios and Funds is provided here. The two January Portfolios are mostly domestic equities while the two iShares ETF funds contain approximately equal amounts of international equities. The two model portfolios were created for the traditional 60/40 stock to bond allocations and more conservative portfolio.

Chart #2: January Model Portfolio Performance

Source: Created by the Author using Portfolio Visualizer

I limited allocations to funds to 10% except for sector funds which had a maximum allocation of 5%. Portfolio Visualizer can be used by interested readers who want to test different funds or allocations.

Table #2: Results of Portfolio Optimization (Since June 2018)

Max Rtn @ 5% Vol Max Rtn @ 8.5% Vol AOM AOR
XLP Consumer Staples Select Sector SPDR ETF 5.0% 5.0%
SPLV Invesco S&P 500 Low Vol 10.0% 10.0%
VCSH Vanguard Short-Term Corp Bond 10.0% 0.0%
FTEC Fidelity MSCI Info Tech 2.0% 5.0%
MOAT VanEck Vectors Morningstar Wide Moat 10.0% 10.0%
IGIB iShares Intmdt -Term Corp Bd 10.0% 10.0%
LGLV SPDR SSGA US Lrg Cap Low Vol 10.0% 10.0%
AGZ iShares Agency Bond 10.0% 0.0%
FREL Fidelity MSCI Real Estate 3.0% 5.0%
SPIB SPDR Port Intmdt Term Corp Bd 10.0% 10.0%
SPTI SPDR Portfolio Intmdt Term Trs 10.0% 10.0%
BSCN Invesco BulletShares 2023 Corp Bd 10.0% 3.5%
DGRO iShares Core Div Growth 0.0% 10.0%
FHLC Fidelity MSCI Health Care 0.0% 2.0%
QUS SPDR MSCI USA Strategic Factors 0.0% 9.5%
AOM iShares Core Mod Alloc 100%
AOR iShares Core Growth Alloc 100%
Metric Max Rtn @ 5% Vol Max Rtn @ 8.5% Vol AOM AOR
CAGR (Return) 11.5% 14.4% 7.2% 7.7%
Max. Drawdown -2.6% -5.9% -4.9% -7.5%
Sortino Ratio (risk Adj Rtn) 3.2 2.2 1.3 1.0
US Stocks 39.6% 65.8% 20.9% 31.1%
Intl Stocks 0.4% 0.7% 20.0% 29.3%
US Bonds 49.9% 28.7% 41.5% 27.5%
Intl Bonds 8.3% 3.8% 16.1% 10.7%
Other 1.3% 0.9% 0.4% 0.3%
Cash 0.6% 0.2% 1.5% 1.2%

Source: Created by the Author using Portfolio Visualizer

The following three charts show the performance of the funds in the January Model Portfolio for the past 18 months.

The net outflows for equity funds (-$180.6 billion) were the group’s worst ever, surpassing the $112.9 billion pulled from equities in 2016. Domestic equity funds, which are funds that invest at least 75% of their assets in U.S. stocks, accounted for the lion’s share of net outflows (-$150.3 billion), while nondomestic equity funds had $30.3 billion leave their coffers.

- Funds Experience Second Largest Annual Net Inflows Ever In 2019

Chart #3: Equity Funds in January Model Portfolio

ChartData by YCharts

Chart #4: Sector Funds in January Model Portfolio

ChartData by YCharts

The net positive flows for taxable bond funds represented the asset group’s second largest in history, trailing only the $384.3 billion in 2009. A handful of taxable bond fund peer groups experienced banner years from a fund flows perspective, including Core Bond Funds (+$110.9 billion), Ultra Short Obligation Funds (+$33.1 billion), Core Plus Bond Funds (+$32.2 billion), and Multi-Sector Income Funds (+$28.9 billion).

- Funds Experience Second Largest Annual Net Inflows Ever In 2019

Chart #5: Bond Funds in January Model Portfolio

ChartData by YCharts

January Model Portfolio - Mutual Fund Observer

The portfolio that maximizes return with 8.5% volatility is loaded into the Mutual Fund Observer Portfolio Tool for validation. The portfolio is rated Moderate (MFO Risk =3). The Ulcer Index measures the depth and length of drawdowns is 1.7 compared to 4.4 for the S&P 500. The Martin Ratio measured the Risk Adjusted Return to be 7.2 compared to 2.4 for the S&P 500. Six of the funds are classified as "Great Owls" by Mutual Fund Observer.

Table #3: Mutual Fund Observer Portfolio Tool

Source: Created by the Author using Mutual Fund Observer

Precious Metals

Many outlooks contain a weaker dollar or higher inflation. I track gold funds as potential hedges for both of these cases. Gold has risen above $1,550. There were only 3 precious metal funds that were rated highly by at least three of the rating entities. These are iShares MSCI Global Gold Miners (RING), VanEck Vectors Gold Miners (GDX), and Aberdeen Standard Physical Palladium Shares (PALL) shown in Chart #5.

Chart #5: Precious Metal Funds

ChartData by YCharts

Table #3 contains all of the precious metals funds rated highly by at least one analyst/system. Chart #6 shows the efficient frontier for these funds.

Table #3: Precious Metals Funds Rated by At Least One Analyst

Ticker Name CAGR Max. Drawdown Sortino Ratio US Mkt Correlation
PALL Aberdeen Standard Phys PalladiumShrs 65.9% -14.5% 5.0 0.4
SGOL Aberdeen Standard Gold 19.1% -3.6% 3.7 -0.1
BAR GraniteShares Gold Trust 19.1% -4.0% 3.6 -0.1
AAAU Perth Mint Physical Gold 19.1% -3.9% 3.6 -0.1
RING iShares MSCI Global Gold Miners 48.6% -10.4% 3.6 0.0
OUNZ VanEck Merk Gold Trust 19.0% -4.0% 3.5 -0.1
IAU iShares Gold Trust 19.0% -4.0% 3.5 -0.2
GLDM SPDR Gold MiniShares 19.0% -3.9% 3.5 -0.1
GLD SPDR Gold Shares 18.9% -4.1% 3.4 -0.2
SGDM Sprott Gold Miners 42.6% -10.6% 3.3 0.0
GDX VanEck Vectors Gold Miners 42.1% -10.6% 3.1 -0.1
GDXJ VanEck Vectors Junior Gold Miners 38.4% -11.7% 2.7 0.0
DBP Invesco DB Precious Metals 16.8% -4.8% 2.6 -0.2

Chart #6: Efficient Frontier of Precious Metals Funds

Source: Created by the Author using Portfolio Visualizer

Closing

With high budget deficits, global uncertainty, slowing profits, high valuations, and slow global growth, I expect more volatility in 2020. The market turmoil last Friday may be a window into performance during more volatile periods in 2020 and bonds, low volatility equity funds, real estate, and gold did well as shown in Chart #7. My preference is to have a tilt to the more conservative portfolio and funds.

Chart #7: Funds That Did Well Last Friday

ChartData by YCharts

It is prudent to take a little money out of the market during these times.

Chart #8: Money Funds

Source: St. Louis Federal Reserve

Disclosure: I am/we are long IAU, VWELX, VWIAX, MNA, BTAL. 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.

Additional disclosure: I am an engineer with an MBA nearing retirement and not an economist nor an investment professional. The information provided is for educational purposes and should not be considered as advice. Investors should do their due diligence research and/or use an investment professional. In September 2019, I began contributing to the Mutual Fund Observer monthly newsletter. I am employed in the precious metals industry.