Creating a Commission Free ETF Portfolio – The TD Ameritrade Portfolio

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I am cheap and hate paying commissions. It is now possible to avoid commissions as several online brokers have begun offering commission free ETF trades.  Over the next week I will introduce 3 commission free ETF portfolios on Scott’s Investments using tactical asset allocation to allocate funds among 10 different ETFs within each portfolio.  Each portfolio will be uniquely tailored for a specific online broker and constructed of only commission free ETFs.  The inspiration for the portfolios is Mebane Faber’s The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets.

The first portfolio is designed for TD Ameritrade clients.  TD Ameritrade offers over 100 commission-free ETFs.  There are some caveats – mainly that clients need to enroll in the commission-free ETF program to be eligible for free trades and ETF held less than 30 days will be assessed a short-term trading fee.  However, for the purpose of this strategy transactions will only occur at the beginning of each month so, with the exception of February, the 30 day holding period should not be a concern.

I chose a 10 ETF portfolio as the model portfolio for the strategy.  There is no one size fits all portfolio size, so the number of positions an investor can or should hold will depend on portfolio size. However, I believe ten  ETFs provides enough diversification across multiple assets classes while also appealing to a wide range of investors. For those with limited funds, a 5 ETF portfolio such as the basic portfolio I track on a monthly basis may be more appropriate and for those with larger portfolios, a 20-25 ETF portfolio could be appropriate.

As a general rule, I prefer at least $5000 per ETF position.  However, this preference has been based on the normal assumption that commissions could eat up a position if it were too small.  If we are not paying commissions for any trades, then position size becomes much less important.  There is still a significant drawback to too many positions – taxes.  If we are constantly trading in and out of positions, gains will be taxed, potentially reducing overall gains.  In addition, we need to ask ourselves if there is a marginal benefit of monitoring a commission-free 20 or 25 ETF portfolio as opposed to 10 positions.  For the purpose of this strategy and portfolio, I do not believe there is a large benefit to expanding beyond 10 positions but I certainly encourage investors to find a portfolio size which matches their own criteria.

The rules for this portfolio are simple:  Buy each ETF at the beginning of the month if it closed the previous month above its 10 month simple moving average.  Check each month at the beginning of the month and only sell the ETF if it closed the month below its 10 month simple moving average.  Keep any proceeds in cash (in other words, do not use the proceeds to purchase one of the other ETFs).

Ignore any activity that occurs within the month.  For example, if the ETF closes the month above its 10 month SMA and falls below its 10 month SMA on the 8th, ignore this “noise”.  The positions should only be bought or sold at the beginning of the month.  Again, for those looking for more in-depth analysis of this strategy I would recommend Faber’s The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets

Since we are in the middle of February, I will begin tracking this portfolio in-depth at the beginning of March with buy/sell recommendations.  However, below are the 10 ETFs in the portfolio.  Each ETF is assigned equal weight if a “buy” signal is generated at the beginning of the month.  For ETFs with no buy signal, the funds which would have been used to purchase/hold it will sit in cash.

Please remember that none of this should be considered investment advice and this exercise is simply for entertainment/fun.

The TD Ameritrade Commission-Free Tactical Asset Allocation (TAA) Portfolio along with the February 1st above/below 10 month SMA update:


Trend Analysis 2/1/11 Above/Below 10 Mo SMA?
DJP iPath DJ-UBS Commodity Index TR ETN Here Yes
DBC PowerShares DB Commodity Index Tracking Here Yes
RWO SPDR Dow Jones Global Real Estate Here Yes
VNQ Vanguard REIT Index ETF Here Yes
TIP iShares Barclays TIPS Bond Here No
BND Vanguard Total Bond Market ETF Here No
VWO Vanguard Emerging Markets Stock ETF Here Yes
VEU Vanguard FTSE All-World ex-US ETF Here Yes
VB Vanguard Small Cap ETF Here Yes
VTI Vanguard Total Stock Market ETF Here Yes

No positions

6 thoughts on “Creating a Commission Free ETF Portfolio – The TD Ameritrade Portfolio”

  1. Scott. Nice experiment. I like the balanced selection of ETFs and look forward to observing the performance over the years…

  2. Scott, I noticed that you compared the backtested performance of your IVY rotation method (top 1 and top 3) using the 6/3/3 and 3/20/20 methods and compared it to S&P performance. How about versus the basic IVY concept of holding all 5 or 10 ETFs for the year with monthly rebalancing? Also what about if you use the 3/6/12 mo moving average to decide whether or not to actually purchase as is suggested in the book?

  3. I'll see if I can post something comparing buy & hold of a portfolio, monthly rotation using relative strength, and a 10 month moving average system. Part of the limitation is some of the ETFs have only been trading for a few years so the backtest length is short. Faber had the resources to test the actual indices going back to the 70s.

  4. Your strategy says to only trade on the beginning of the month, but wouldn’t the same strategy work with trading on any specific day of the month (eg. the 25th)? If the signal is updated every day, the actual day of the month would seem to be irrelevant, and trading on the same day as everyone else might even to be counter-productive(?).

    1. In theory it would work but I have not tested other re-balance dates. I created the spreadsheet to be as flexible as possible so it updates daily. Trading on different days than other month-end re-balancers is an interesting idea, but I have not seen any research on whether this increases returns.

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