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A Relative Strength ETF Portfolio for October

|Includes: DBA, iShares MSCI Emerging Markets ETF (EEM), RWX, SCZ
I previously detailed here and here how an investor can use ETF Replay to screen for best performing ETFs based on momentum and volatility. Users can set up their own portfolios, track, and backtest them for free on ETF Replay. I originally created a portfolio of 22 ETFs which I believe represent a broad range of markets and last month I expanded it to 25 ETFs.  I swapped PFF (preferred stock) for SDY in order to get an ETF that has less correlation to SPY. I also added SCZ (EAFE Small Cap).  I update and track the portfolio monthly on my site.  

The strategy 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; users have the flexibility to change these timeframes as well). I am also now tracking the performance of a strategy which combines the average of shorterm timeframes, 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".   For some backtests on these strategies please see my previous posts or August's list.

Last month's top 3 returned -.41%  for the 6/3/3 strategy and .28% for the 3/20/20 strategy, underperforming US equity ETFs such as SPY which returned 6.93%.

As of the close on September 30th, the top 3 ETFs in the basket of 25 for the 6/3/3 strategy were:

DBA    DB Agricultural Commodities Index
PowerShares Emerging Mkts Bond (7.6yr) 
RWX   DJ International Real Estate SPDR

 The top 3 ETFs in the basket of 25 for the 3/20/20 strategy were:

EEM   iShares MSCI Emerging Markets
RWX    DJ International Real Estate SPDR  

SCZ    iShares MSCI EAFE Small Cap Index

I should emphasize that users are not limited to rebalancing/reviewing this list on the 1st of the month.  It can be checked/updated at any point in time.  However, the more frequently it is reviewed and rebalanced, the higher the potential transaction costs.  In the backtest to the beginning of 2005, there were 57 total changes, which equates to roughly 10 per year on average which is not overly aggressive in my opinion, especially given the plethora of low-cost brokers available.  Of course, if you can find a broker to give you free ETF trades like many are nowoffering, the potential costs can be reduced even further.

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