ETFReplay Portfolio for July

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.

For 2013 the static basket of ETFs was reduced from 25 to 15. From this basket of 15, the top 4 are purchased 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 6/28/13 are below:

VTI Vanguard MSCI Total U.S. Stock Market
SHY Barclays Low Duration Treasury (2-yr)
HYG iShares iBoxx High-Yield Corp Bond (4-5yr)
EFA iShares MSCI EAFE
VNQ Vanguard MSCI U.S. REIT

Last month the strategy moved to 75% cash with the balance in VTI. For July there is no change to the allocation. Since cash is the second highest rated ETF, anything rated below it does not qualify. This is a defensive allocation, as a result of recent volatility and negative performance in a variety of equity, commodity and bond markets.

The strategy’s performance since inception is below, as is comparative performance of the SPDR S&P 500 ETF (SPY), a balanced allocation ETF, the iShares Growth Allocation (AOR), and the Permanent Portfolio (PRPFX):

etfreplay

Ivy & Commission Free Portfolios – July Update

Early in 2012  Scott’s Investments added a daily Ivy Portfolio spreadsheet. This tool uses Google Documents and Yahoo Finance to track the 10 month moving average signals for two of the portfolios listed in Mebane Faber’s book The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets. Faber discusses 5, 10, and 20 security portfolios that have trading signals based on long-term moving averages.

The Ivy Portfolio spreadsheet tracks the 5 and 10 ETF Portfolios listed in Faber’s book. When a security is trading below its 10 month simple moving average, the position is listed as “Cash”. When the security is trading above its 10 month simple moving average the positions is listed as “Invested”.

The spreadsheet’s signals update once daily (typically in the late evening) using dividend/split adjusted closing price from Yahoo Finance. The 10 month simple moving average is based on the most recent 10 months including the current month’s most recent daily closing price.  Even though the signals update daily, it is not an endorsement to check signals daily. It simply gives the spreadsheet more versatility for users to check at his or her leisure.

The page also displays the percentage each ETF within the Ivy 10 and Ivy 5 Portfolio is above or below the current 10 month simple moving average, using both adjusted and unadjusted data.

If an ETF has paid a dividend or split within the past 10 months, then when comparing the adjusted/unadjusted data you will see differences in the percent an ETF is above/below the 10 month SMA. This could also potentially impact whether an ETF is above or below its 10 month SMA. Regardless of whether you prefer the adjusted or unadjusted data, it is important to remain consistent in your approach. My preference is to use adjusted data when evaluating signals.

Top 50 Trending Stocks

The current signals based on June 28th closing prices are below. The month of June was not kind to almost every major asset class and the 10 month SMA signals for the majority of ETFs indicate a cash position for July. However, US equities and REITs remain above their 10 month SMA and invested.

The first table is based on adjusted historical data and the second table is based on unadjusted price data:

ivy july adjusted ivy july unadjusted

As an added bonus I created a “Commission-Free” Ivy Portfolio spreadsheet. This document tracks the 10 month moving averages for four different portfolios designed for TD Ameritrade, Fidelity, Charles Schwab, and Vanguard commission-free ETF offers.

Not all ETFs in each portfolio are commission free, as each broker limits the selection of commission-free ETFs and viable ETFs may not exist in each asset class. Other restrictions and limitations may apply depending on each broker.

Vanguard recently added a short-term treasury inflation-protected ETF to its lineup (symbol VTIP) and it replaces TIP in the Vanguard portfolio.

Below are the 10 month moving average signals (using adjusted price data) for the commission-free portfolios:

commission free july commission free july2

Readings & Updates

I am behind on new content this month due to some severe weather in our area, which included several days of no power and downed trees (including 2 on my house!).  The month end updates will still be posted Sunday evening/Monday morning. Needless to say, recent market volatility should create some interesting signals.

Below are a few articles I am reading tonight:

Precious Metals Life Cycle is Nears an End – Final Stage of Denial – The Gold and Oil Guy

 Next Bust Creeps a Little Closer – Jim Jubak

Whither China? (pdf) John Mauldin

GMO’s Montier on Why to Hold Cash – Advisor Perspectives

Missed the Big Market Rally? Here’s What to Do Now – Barry Ritholtz

The Risks in Risk Parity & What Happens When You Buy Assets Down 80%? – Mebane Faber

Market Internals Suggest a Shift to Risk-Aversion – John Hussman

Monday Readings

Below are a handful of articles I am reading this week:

Mebane Faber has updated his QTAA paper. Here are parts 6, 7, 8, 9, 10, and 11

Pairs Trading Kicks Butt! Turnkey Analyst

A Better Alternative to Cap Weighted Bond Indices – Advisor Perspectives

The Risk of Government Policies and the Rationing of Retirement & Economists Are (Still) Clueless – John Mauldin

The Price of Distortion – John Hussman

Dual ETF Momentum Portfolio – June Update & Backtests

In February I announced a new “Dual ETF Momentum” spreadsheet. The idea was inspired by a paper written by Gary Antonacci and available on Optimal Momentum.

The spreadsheet is available on Scott’s Investment’s here. The objective of the spreadsheet is to track four pairs of ETFs and provide an “Invested” signal for the ETF in each pair with the highest relative momentum.

Relative momentum is gauged by the 12 month total returns of each ETF. The 12 month total returns of each ETF is also compared to a short-term Treasury bill ETF (a “cash” filter). In order to have an “Invested” signal the ETF with the highest relative strength must also have 12-month total returns greater than the 12-month total returns of the cash ETF. This is the absolute momentum filter which is detailed in depth by Antonacci, and has historically helped increase risk-adjusted returns.

I have added an “average” return signal for each ETF on the spreadsheet. The concept is the same as the 12-month relative momentum. However, the “average” return signal uses the average of the past 3, 6, and 12 (“3/6/12″) month total returns for each ETF. The “invested” signal is based on the ETF with the highest relative momentum for the past 3, 6 and 12 months. The ETF with the highest average relative strength must also have an average 3/6/12 total returns greater than the 3/6/12 total returns of the cash ETF.

Below are the four portfolios along with current signals.

Return data courtesy of Finviz
Equity  ETF Average of Quarterly/Half/Full Year % Returns Signal based on 1 year returns Signal based on average returns
US Equities VTI 15.67 Invested Invested
International Equities VEU 7.68
Cash SHY 0.04
Credit Risk  ETF Average of Quarterly/Half/Full Year % Returns Signal based on 1 year returns Signal based on average returns
High Yield Bond HYG 3.41 Invested Invested
Interm Credit Bond CIU 0.38
Cash SHY 0.04
Real-Estate Risk  ETF Average of Quarterly/Half/Full Year % Returns Signal based on 1 year returns Signal based on average returns
Equity REIT VNQ 6.51 Invested Invested
Mortgage REIT REM -1.37
Cash SHY 0.04
Economic Stress  ETF Average of Quarterly/Half/Full Year % Returns Signal based on 1 year returns Signal based on average returns
Gold GLD -15.55
Long-term Treasuries TLT -4.95
Cash SHY 0.04 Invested Invested

As an added bonus, the spreadsheet also has four additional sheets using a dual momentum strategy with broker specific commission-free ETFs for TD Ameritrade, Charles Schwab, Fidelity, and Vanguard. It is important to note that each broker may have additional trade restrictions and the terms of their commission-free ETFs could change in the future.

Using Portfolio123 I backtested a similar strategy using the same portfolios and combined momentum score used above. However, to simplify the screen I did not require an ETF to be ranked above the combined return of SHY; rather, an ETF simply needed the average of its 13 week/26 week/52 week total return to be greater than 0% (the “absolute” momentum filter). Also, the portfolio re-balanced every 4 weeks as opposed to the end of each month.  No considerations were made for taxes or commissions. The test time period was 5/1/08 – 6/10/13 and the benchmark is SPY:

dual momentum test2

A four year test period is short by historical standards but the test is limited to the trading history of ETFs within the portfolio. A more robust, index-based test of the dual momentum strategy can be found on Optimal Momentum.

If you enjoy these free tools, please consider making a donation on the home page of Scott’s Investments using the Paypal link in the upper-right corner!

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Sunday Readings

Below is my Sunday night reading list.

From Mebane Faber, a series of updates on his “A Quantitative Approach to Tactical Asset Allocation” paper: Part 1, 2, 3, 4, and 5 of 10 updates.

John Mauldin on Central Bankers Gone Wild and Banzai! Banzai! Banzai! (pdf)

Advisor Perspectives: Dynamic Asset Allocation for Practitioners Part 1: The Many Faces of Momentum

Bill Gross:  Wounded Heart

John Hussman Following the Fed to 50% Flops and 2009 vs 2013

Simple Moving Averages vs. Exponential Moving Averages – Turnkey Analyst

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Stop Iran Rally In NYC, September 1, 2015
Crucial Montier Quote
Think In Terms Of Years & Decades
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Saturday Readings

I am way behind on my reading list, so I will post half of my list and the other half tomorrow. It is summer time and priorities tend to shift with the change in weather….nevertheless, there are some worthwhile articles to read this weekend.

From The Gold and Oil Guy This Weeks Stock Market Reversals Explained and Gold, Silver & Precious Metal Miners Signals

From Index Universe,

 What the Bull Giveth, the Bear Taketh Away – Butler|Philbrick|Gordillo & Associates

From Turnkey Analyst:

High Yield Dividend Champion Portfolio Update

In December 2010, I created a screen/hypothetical portfolio called the “High Yield Dividend Champion Portfolio.” The screen is tracked publicly as a continuous hypothetical portfolio with a starting balance of $100,000 on Scott’s Investments.

Like many of the screens, strategies, and portfolios I track and prefer, the High Yield Dividend Champion Portfolio uses a small number of historically relevant ideas to create a simple, yet powerful investment plan. As I previously detailed, “Some studies have shown that the, highest yielding, low payout stocks perform better over time than stocks with higher payouts and lower yields.”

The High Yield Dividend Champion Portfolio attempts to capture the best high yield, low payout stocks with a history of raising dividends. There are numerous ways to rank high yield/low payout stocks. The screening process for this portfolio starts with the “Dividend Champions” as compiled by DRIP Investing. The list is comprised of stocks that have increased their dividend payout for at least 25 consecutive years.

In January I announced some changes to the ranking system. The changes were not due to poor performance – the strategy has returned over 60% since late 2010.

We still begin with the Dividend Champion list. The list is first sorted by yield and the lowest 50% yielding stocks are eliminated. Eliminating the lowest yielding stocks ensures only stocks with a “high” yield make the portfolio.

The remaining stocks are then assigned a rank based on their yield (the higher the yield the higher the rank), payout ratio (the lower the payout ratio the higher the rank), 3 year dividend growth rate, and 5/10 year Dividend Acceleration/Deceleration (5-year average increase divided by 10-year average increase).  Extra weight is given to yield and payout ratio rankings.

The top 10 stocks based on the new ranking system make the portfolio. Stocks will be sold at the re-balance date (generally around the 5th of the month) when they drop out of the top 15 (to limit turnover) and are replaced with the next highest rated stock.

This month there is no turnover. Universal Corp (UVV) was close to elimination, but since it is currently tied for 15th it remains in the portfolio.  UVV has been in the portfolio since 4/5/12, and has appreciated over 30% (excluding dividends) as a holding.

(Chart courtesy of Portfolio123)

UVV

The top 17 stocks based on my ranking methodology are below and displayed in order of their overall ranking (figures are May month-end):

Name Symbol Yield Payout 5-10 A/D 3-yr
WGL Holdings Inc. WGL 3.91 55.45 1.35 2.89
Chevron Corp. CVX 3.26 30.23 0.96 9.68
American States Water AWR 3.05 54.36 1.53 7.93
Altria Group Inc. MO 4.88 81.48 1.25 8.71
UGI Corp. UGI 2.96 51.36 1.15 10.53
ExxonMobil Corp. XOM 2.79 25.69 1.08 9.51
Tompkins Financial Corp. TMP 3.66 59.61 0.84 5.70
Air Products & Chem. APD 3.01 57.03 0.94 11.78
Leggett & Platt Inc. LEG 3.63 67.84 1.15 3.81
California Water Service CWT 3.24 57.66 1.41 2.21
Northwest Natural Gas NWN 4.26 86.26 1.24 3.81
Clorox Company CLX 3.42 66.51 0.91 8.91
Genuine Parts Co. GPC 2.77 51.93 1.17 6.76
Weyco Group Inc. WEYS 2.99 42.86 0.71 4.40
Conn. Water Service CTWS 3.42 62.18 1.28 2.17
Universal Corp. UVV 3.41 43.01 0.58 2.13
Questar Corp. STR 2.96 60.50 1.03 9.61

The current portfolio is below:

Position Purchase Price Purchase Date Percentage Gain/Loss Excluding Dividends
CVX 106.45 12/6/2012 13.28%
WGL 38.61 12/6/2012 12.15%
GPC 65.63 1/7/2013 15.65%
UVV 45.55 4/5/2012 30.08%
CWT 19.74 4/5/2013 0.76%
APD 87.49 2/5/2013 8.07%
XOM 89.01 4/5/2013 1.37%
MO 34.24 3/5/2013 4.59%
TMP 40.6 5/3/2013 3.33%
NWN 44.24 4/5/2013 -2.83%

 

If you enjoy these free tools, please consider making a donation on the home page of Scott’s Investments using the Paypal link in the upper-right corner!

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Backtesting Portfolio Strategies

Several readers inquired recently about backtested results of various portfolio strategies tracked on Scott’s Investments. Several of the portfolios on this site are tracked real-time and I have also posted dozens of backtests on the site (use the search bar on the right-hand side of the site), but I have posted some updated results below.

The most important caveat regarding the tests below is that the time-frame is incredibly short by historical standards. Good results should not be taken as a guarantee of future results, and lower than expected results should not necessarily be interpreted as a strategy failure.  All tests were conducted using ETFReplay.com

The first set of tests use the parameters of the ETFReplay.com Portfolio and was conducted on a short time frame (2009-2013) due to shorter trading histories for many of the 15 ETFs used in the strategy.  To simplify the tests I did not incorporate the “top 5” filter where an ETF has to drop out of the top 5 before being sold. The tests use the “6/3/3” strategy, and the cash filter requires the ETFs be ranked above SHY in order to be held. The benchmark used is Vanguard Balanced Index Fund (VBINX):

2009-2013 Total Return Volatility CAGR Sharpe Max Drawdown
Top 4, No cash filter, Updated Monthly 87.60% 12% 15.30% 1.15 -8.60%
Top 4, cash filter, Updated Monthly 83.90% 11.80% 14.80% 1.13 -8.60%
VBINX 71.80% 12% 13.10% 0.97 -17.50%

 

The Ivy Portfolio is a popular strategy and the best historical results can be found in Mebane Faber’s The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets. The results below were generated using a slightly different set of ETFs due to their longer trading histories:

2005-2013 Total Return Volatility CAGR Sharpe Max Drawdown
Ivy Portfolio 66.10% 9.80% 6.20% 0.37 -14.70%
VBINX 64.90% 12.70% 6.10% 0.3 -36%
Ivy Portfolio Symbols Used in Test
SPY
AGG
EFA
GSCI Index
VNQ

Finally, the last set of tests analyzes the All-Weather and Permanent Portfolio.  The All-Weather portfolio is not equal weighted, while the Permanent Portfolio equal weights the four positions. For the static weightings used in the All-Weather test please view the portfolio spreadsheet. The All-Weather risk parity allocation changes based on the trailing 20 day volatility and allocations were updated monthly. For the current weightings view the spreadsheet on Scott’s Investments:

2005-2013 Total Return Volatility CAGR Sharpe Max Drawdown
All-Weather, Annual Rebalance 85.30% 6.00% 7.60% 0.8 -19.83%
All-Weather, Risk-Parity using 20 day volatility, monthly rebalance 83.10% 4.60% 7.50% 1.04 -18.30%
Permanent Portfolio, Annual Rebalance 99.30% 7.50% 8.60% 0.77 -14.03%
All-Weather Symbols Perm.
GLD GLD
GSCI Index SHY
IEF SPY
PREMX TLT
TLT
VIPSX
VTI
VWEHX

If you enjoy these tools and content, please consider making a donation on the home page of Scott’s Investments using the Paypal link in the upper-right corner!

ETFReplay Portfolio for June

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 was 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 5/31/13 are below:

VTI Vanguard MSCI Total U.S. Stock Market
SHY Barclays Low Duration Treasury (2-yr)
HYG iShares iBoxx High-Yield Corp Bond (4-5yr)
VNQ Vanguard MSCI U.S. REIT
EFA iShares MSCI EAFE

For June the strategy is moving to 75% cash. This will be the first time in 2013 that the absolute momentum filter has come into play and the first time since 2009 the strategy has less than 2 non-cash ETFs.  Since SHY is the second highest rated ETF, anything ranked below it will not be held.  The balance of the portfolio will continue to hold VTI since it is the highest rated ETF.

VNQ was sold for a gain of 2.4% and purchase date of 2/28/13, HYG for a loss of 1.52% and purchase date of 3/28/13, and RWX for a gain of .93% and purchase date of 10/31/12 (individual returns exclude any dividends).

The absolute momentum filter comes as somewhat of a surprise this month, although volatility increased in several asset classes in May. Time will tell if this conservative rotation helps reduce drawdowns or is a false signal.