Portfolio Update – Strategy Modification

Among the more popular portfolios on Scott’s Investments has been the Portfolio. The strategy has been revised and improved for 2013 in order to make it simpler to follow.

I previously detailed here and here how an investor can use to screen for best performing ETFs based on momentum and volatility.   I select only the top 4 ETFs out of a static basket of  ETFs and re-balance the portfolio monthly. Previously, the static basket of ETFs was 25. This number of ETFs creates a high degree of turnover and also creates cross-over among ETFs that have a high correlations. For example, if you are only purchasing 4 ETFs each month and 2 or 3 of the ETFs are highly correlated, there is little benefit in holding more than 1 of the ETFs.

For 2013 the static basket of ETFs has been reduced to 14. From this basket of 14, the top 4 will be selected each month. The portfolio will be re-balanced at the beginning of each month. When a holding drops out of the top 5 ETFs it will be sold and replaced with the next highest ranked ETF. I added the top 5 requirement in order to further limit turnover.

ETFs will be ranked on a combination of their 6 month returns, 3 month returns, and 3 month volatility (lower volatility receives a higher ranking). I will no longer combine these rankings with the rankings based on a combination of 3 month returns, 20 day returns, and 20 day volatility.

In addition, ETFs must be ranked above the cash ETF SHY in order to be included in the portfolio, similar to the absolute momentum strategy I profiled here. This modification could help reduce drawdowns during periods of high volatility and/or negative market conditions (see 2008-2009).

The 14 ETFs I will screen each month are below:

Symbol Name
RWX SPDR DJ International Real Estate
PCY PowerShares Emerging Mkts Bond
WIP SPDR Int’l Govt Infl-Protect Bond
HYG iShares iBoxx High-Yield Corp Bond
EEM iShares MSCI Emerging Markets
LQD iShares iBoxx Invest Grade Bond
TIP iShares Barclays TIPS
VTI Vanguard MSCI Total U.S. Stock Market
DBC PowerShares DB Commodity Index
GLD SPDR Gold Shares
DBA PowerShares DB Agricultural Commodities
TLT iShares Barclays Long-Term Trsry

The top 4 ETFs as of 12/31/12 were:

Symbol Name
RWX SPDR DJ International Real Estate
PCY PowerShares Emerging Mkts Bond
WIP SPDR Int’l Govt Infl-Protect Bond
EEM iShares MSCI Emerging Markets

Only one position is new, EEM. The position in PowerShares DB G10 Currency Harvest (DBV) which was dropped from the list of 14 ETFs, will be sold and replaced with EEM for January 2013.

12 thoughts on “ Portfolio Update – Strategy Modification”

  1. Re the new (1.2.13) modication to the strategy: In the copy above you mention that you are now only going to buy the top 4 in the 6/3/3 screen, and that you are no longer combining it with the 3/20/20 screen. However, the current spreadheet still includes the use of both screens. Just alerting you to this as I think you do a gret job with your website overall and I’ve learned an awful lot from following it over the past couple of years. And yes, that reminds me – I will be sending another donation soon!

    I’m planning to revise another portfolio I use with ER (ETFreplay) to incorporate the use of just the 6/3/3 screen as it seems to make sense to me too. Also I’ beginning to use a Permanent Portfolio (Harry Browne style essentially, using just the 4 basic ETFs for Cash, Bonds, Stocks and Gold. And I believe I saw somewher that you suggested using a split version of this, 1/2 using ER for Top 2 of the 4 and the other using the 10Mo SMA. For the former do you also suggest using just the 6/3/3 screen?

    1. Hi Bob Thanks for pointing that out, I wanted to get the sheet up quickly after the first of the year so I will be doing some editing shortly. I did run some tests of the permanent portfolio doing top 2 momentum and moving average rules. I may actually start tracking those signals in a new sheet and will link some of my tests on it. You can also search the site for ‘permanent portfolio’

      1. Thanks, Scott. I have already searched your site for Permanent P’folio and did of course find a lot of useful data. And I look forward to your tracking this data, too. You’re good!

    1. Yes, returns in the article includes dividends (if you check the spreadsheet between the monthly updates they may not be included)

  2. Scott, per the modified strategy, what do you do with an ETF that makes the top 5 cut but falls below cash returns, as is the case in June. Sell and rebalance into cash and remaining higher performing ETFs?

    1. The strategy is setup to hold cash in lieu of any top 5 ETF that is below cash returns For example, if 3 ETFs in the top 5 are above cash and 2 are below cash returns, the portfolio would be approximately 60% invested and 40% in cash. However, to limit turnover/transactions costs I’m not rebalancing back to equal weight if there are existing ETFs in the portfolio that are held over from the previous month.

  3. Scott, how about doing the ETFReplay Portfolio with Commission Free ETFs. Now, you are starting to take your BEST ETF Portfolio and mixing it up with the tastiest combinations from other portfolios. There might be other combinations that might be beneficial also.

    In this case, if one of the ETFs have really taken off (like gold did), a bit of rebalancing would have helped looking back to the last 1-5 years. It would help with the Bonds also, since they were taking off like a rocket in the periods of low interest rates.

    I am NOT suggesting that we change ETF allocations every month (too much work), but change it when you hit a certain threshold.

    Of course, this might mean that backtesting results from ETFreplay might not be available doing this, but worth recommending or doing since this is ‘WHAT HAS PROVEN’ to be the right way to do Asset Allocation in all of the Graduate Study papers that have been written by PhD students (which churned a lot of data). I am not one of them, nor have a PhD (so no bias)!


    1. I’m not sure I completely understand the suggestion – do you mean combine the 2 portfolios into one and backtest the results?

      1. Yes, mixing the two portfolios. Doing some rebalancing with the additional free-trading-etfs and also utilizing what you found as a better strategy.


  4. Hey Scott,

    Any suggestions for those entering these half way through? In other words, any entry points for when these strategies have already returned 64% like the High Yield Dividend champion?


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