Among the more popular portfolios on Scott’s Investments has been the ETFReplay.com 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 ETFReplay.com 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 15. From this basket of 15, 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).
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 top 5 ranked ETFs as of 2/28/13 are below:
|RWX||SPDR DJ International Real Estate|
|VTI||Vanguard MSCI Total U.S. Stock Market|
|VNQ||Vanguard MSCI U.S. REIT|
|HYG||iShares iBoxx High-Yield Corp Bond (4-5yr)|
|EFA||iShares MSCI EAFE|
The position in iShares MSCI Emerging Markets (EEM) was closed for a loss of 2.57% (excluding dividends) and SPDR International Government Inflation Protected Bond (WIP) for a loss of 1.71% (excluding dividends). These positions were replaced by Vanguard MSCI Total US Stock Market (VTI) and Vanguard MSCI U.S. REIT (VNQ).
The four current positions are below:
|Position||Shares||Purchase Price||Purchase Date|