February’s ETF Replay Portfolio

This month’s ETFReplay.com Relative Strength ETF Portfolio has been updated at Scott’s Investments and includes turnover in three positions.

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Strategy Background

I previously detailed here and here how an investor can use ETFReplay.com 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 Scott’s Investments.  As of the close January 31st the hypothetical portfolio was up 10% since inception, including dividends (returns exclude commissions and taxes and all trades are hypothetical so real results will differ).  For some backtests on these strategies please see a post from mid-September.


February 2012 Updates

For January 31st the strategy sold its positions in  (PCY (PowerShares Emerging Mkts Bond), HYG (iShares iBoxx High-Yield Corp Bond), and VNQ (Vanguard MSCI U.S. REIT). The proceeds were used to purchase  IEF (iShares Barclays 7-10 Yr Treasury), 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.

Last month 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 January 31st, 2012:

Below are the full rankings of both the 6/3/3 and 3/20/20 strategies, in order from top to bottom ranked:


6mo/3mo/3mo
Symbols Name
IEF iShares Barclays 7-10 Yr Treasury (7-8yr)
TIP iShares Barclays TIPS (8yr)
TLT iShares Barclays Long-Term Trsry (15-17yr)
LQD iShares iBoxx Invest Grade Bond (7-8yr)
PFF iShares S&P US Preferred Stock Index
PCY PowerShares Emerging Mkts Bond (7-9yr)
VNQ Vanguard MSCI U.S. REIT
HYG iShares iBoxx High-Yield Corp Bond (4-5yr)
SHY Barclays Low Duration Treasury (2-yr)
XLU U.S. Utilities Sector SPDR
SPY SPDR S&P 500 Index
GLD SPDR Gold Shares
VBR Vanguard MSCI U.S. SmallCap Value
DBV PowerSh DB G10 Currency Harvest
WIP SPDR Int’l Govt Infl-Protect Bond (9-10yr)
BWX SPDR Barcap Global Ex-U.S. Bond (6-7yr)
DBC PowerShares DB Commodity Index
LSC Elements S&P C.T.I.
DBB PowerShares DB Base Metals
XLE U.S. Energy Sector SPDR
DBA PowerShares DB Agricultural Commodities
EEM iShares MSCI Emerging Markets
RWX SPDR DJ International Real Estate
SCZ iShares MSCI EAFE Small Cap Index
EFA iShares MSCI EAFE Index





3mo/20day/20day
Symbols Name
PFF iShares S&P US Preferred Stock Index
VBR Vanguard MSCI U.S. SmallCap Value
TIP iShares Barclays TIPS (8yr)
VNQ Vanguard MSCI U.S. REIT
SPY SPDR S&P 500 Index
IEF iShares Barclays 7-10 Yr Treasury (7-8yr)
LQD iShares iBoxx Invest Grade Bond (7-8yr)
HYG iShares iBoxx High-Yield Corp Bond (4-5yr)
WIP SPDR Int’l Govt Infl-Protect Bond (9-10yr)
DBV PowerSh DB G10 Currency Harvest
DBB PowerShares DB Base Metals
SHY Barclays Low Duration Treasury (2-yr)
GLD SPDR Gold Shares
TLT iShares Barclays Long-Term Trsry (15-17yr)
PCY PowerShares Emerging Mkts Bond (7-9yr)
EEM iShares MSCI Emerging Markets
BWX SPDR Barcap Global Ex-U.S. Bond (6-7yr)
RWX SPDR DJ International Real Estate
SCZ iShares MSCI EAFE Small Cap Index
DBC PowerShares DB Commodity Index
XLU U.S. Utilities Sector SPDR
LSC Elements S&P C.T.I.
EFA iShares MSCI EAFE Index
XLE U.S. Energy Sector SPDR
DBA PowerShares DB Agricultural Commodities

No current positions

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