ETFReplay Portfolio for October

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), but it could also reduce total returns by allocating to cash in lieu of an asset class.

The top 5 ranked ETFs as of 9/30/13 are below:

EFA iShares MSCI EAFE
VTI Vanguard MSCI Total U.S. Stock Market
SHY Barclays Low Duration Treasury
HYG iShares iBoxx High-Yield Corp Bond
RWX SPDR DJ International Real Estate

Since cash is the third highest rated ETF, anything rated below it does not qualify for purchase. This is still a somewhat a defensive allocation, as a result of recent volatility and negative performance in a variety of equity, commodity and bond markets.

For October the portfolio is purchasing VTI and EFA, and will keep 50% in cash. A more aggressive approach would disregard the cash filter. However, the objective of the portfolio is balance risk and reward while reducing drawdowns.

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

etfreplay october

Ivy & Commission Free Portfolios – October 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 September’s closing prices are below. As with recent months, US equities continue to show strength and developed international equities are also showing strength.

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

october adjusted

 

october unadjusted

I also provide a “Commission-Free” Ivy Portfolio spreadsheet as an added bonus. 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.

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

commission free october commission free october2

Sunday Reading

Below are investment-related articles I am reading this weekend:

QE Forever & The Case For Systematic Decision-Making – Turnkey Analyst

CAPE Crusaders – Optimal Momentum

A Generational Low in Managed Futures – Attain Capital

T Rowe Price Files for Nontransparent ETFs – Index Universe

Does CAPE Work on Stocks? Mebane Faber

Uttin’ on the Utz & Rich City, Poor City – John Mauldin

Dalio: How the Economic Machine Works (via The Big Picture)

Thursday Readings

Sign up for INO’s FREE Daily Analysis & Commentary: Sector Analysis, Support/Resistance Levels, and key events are all included for free!

Below is my reading list for tonight:

Turnkey Analyst: Cloud-Based Discounted Cash-Flow Analysis Tool & Recommending the Trend

Keeping It Simple: Trend and Valuation – Mebane Faber

Smart Beta and the Pendulum of Mispricing – Research Affiliates

Index Universe – Arnott: Demographics and the New Normal

Satyajit Das: In Japan, Neither the 2020 Olympics Nor Abenomics Will Be Magic Bullet  & Is An Emerging Market Crisis Coming?

Nothing But Bad Choices & Advantage America – John Mauldin

More on this topic (What's this?)
High Beta Underperforming Low Volatility
Read more on Investing in Japan, Beta at Wikinvest

Dual ETF Momentum Portfolio – September Update

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 ETF (a “cash” filter) in the form of iShares Barclays 1-3 Treasury Bond ETF (SHY). 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 SHY. 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.

Using Portfolio123 I backtested a similar strategy using the same portfolios and combined momentum score used above. You can view the backtest results in June’s update and I will also be posting new test results in the coming days.

Below are the four portfolios along with current signals:

Return data courtesy of Finviz
Equity Representative ETF Signal based on 1 year returns Signal based on average returns
US Equities VTI Invested Invested
International Equities VEU
Cash SHY
Credit Risk Representative ETF Signal based on 1 year returns Signal based on average returns
High Yield Bond HYG Invested Invested
Interm Credit Bond CIU
Cash SHY
Real-Estate Risk Representative ETF Signal based on 1 year returns Signal based on average returns
Equity REIT VNQ Invested
Mortgage REIT REM
Cash SHY Invested
Economic Stress Representative ETF Signal based on 1 year returns Signal based on average returns
Gold GLD
Long-term Treasuries TLT
Cash SHY Invested Invested

US equities are leading international equities, high yield bonds lead credit bonds, and cash leads gold and long-term treasuries. Equity REITs lead mortgage REITs and cash based on 1 year returns, while cash leads both equity and mortgage REITs based on the average of 3/6/12 month returns.  This is the same result as last month.

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

Sunday Readings

Happy NFL opening weekend! Below is my investment reading list for this weekend, which I am behind on due to the overindulgence of football this weekend:

This an important article I encourage everyone to read – Momentum Back Testing, Optimal Momentum

Why Interest Rates Matter for Hedge Fund Returns – Turnkey Analyst
Click here for the Top 50 Trending Stocks from INO.com


Ferri vs Arnott: Is Smart Beta Real? IndexUniverse

Swedroe:10 Reasons to Go Active – Not – IndexUniverse

Pimco’s El-Erian Revisits the New Normal – IndexUniverse

Seventh-Inning Stretch – Bill Gross

Is the Stock Market Cheap? Doug Short

Do Income-Oriented Portfolios Reduce Safe Withdrawal Rates? – Geoff Considine

Unrealistic Expectations – John Mauldin

Also, two new sites to checkout (hat tip Meb Faber) – Cape Ratio Calculator & Stock Market Selection Strategies

 

More on this topic (What's this?)
Some light reading:
High Beta Underperforming Low Volatility
Read more on Hong Kong Ferry, Hedge Funds, Beta at Wikinvest

September 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. We still begin with the Dividend Champion list, which 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. All current positions will be held until next month.

The top 15 stocks based on my ranking methodology are below and displayed in order of their overall ranking (figures are August month-end):

Name Symbol Yield Payout A/D* 3-yr
Helmerich & Payne Inc. HP 3.17 30.44 1.52 11.87
Chevron Corp. CVX 3.32 32.41 0.96 9.68
Altria Group Inc. MO 5.67 87.67 1.25 8.71
ExxonMobil Corp. XOM 2.89 31.74 1.08 9.51
Universal Corp. UVV 4.08 33.96 0.58 2.13
WGL Holdings Inc. WGL 4.02 62.22 1.35 2.89
American States Water AWR 3.08 53.47 1.53 7.93
UGI Corp. UGI 2.88 47.48 1.15 10.53
Target Corp. TGT 2.72 41.45 1.10 24.74
Leggett & Platt Inc. LEG 4.15 69.77 1.15 3.81
Questar Corp. STR 3.28 60.50 1.03 9.61
Northwest Natural Gas NWN 4.43 85.45 1.24 3.81
Tompkins Financial Corp. TMP 3.50 58.91 0.84 5.70
Genuine Parts Co. GPC 2.79 48.31 1.17 6.76
Clorox Company CLX 3.43 65.74 0.91 8.91

The current portfolio is below:

Position Purchase Date Percentage Gain/Loss Excluding Dividends
CVX 12/6/2012 14.02%
WGL 12/6/2012 3.83%
HP 7/5/2013 -1.50%
UVV 4/5/2012 7.73%
UGI 8/5/2013 -9.67%
LEG 8/5/2013 -7.88%
XOM 4/5/2013 -1.86%
MO 3/5/2013 0.03%
AWR 7/5/2013 -5.43%
NWN 4/5/2013 -9.43%

The portfolio performance is below along with three benchmarks:

benchmarks

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!

More on this topic (What's this?)
Is time spent learning dividend investing worth it?
7 Higher Yield Dividend Growth Stocks
Preventing Blind Spots in Dividend Investing
Read more on Dividend Investing, Dividends at Wikinvest

ETFReplay Portfolio for September

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), but it could also reduce total returns by allocating to cash in lieu of an asset class.

The top 5 ranked ETFs as of 8/30/13 are below:

6mo/3mo/3mo
SHY Barclays Low Duration Treasury
VTI Vanguard MSCI Total U.S. Stock Market
DBC PowerShares DB Commodity Index
HYG iShares iBoxx High-Yield Corp Bond
EFA iShares MSCI EAFE

This is little changed compared to last two months. Since cash is the highest rated ETF, anything rated below it does not qualify for purchase. This is a defensive allocation, as a result of recent volatility and negative performance in a variety of equity, commodity and bond markets.

For September the portfolio is selling its only current position, VTI, for a gain of 8.35% and holding the entire portfolio in cash. A more aggressive approach would disregard the cash filter. However, the objective of the portfolio is balance risk and reward while reducing drawdowns.

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

benchmarks

Ivy & Commission Free Portfolios – September 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 August’s closing prices are below. As with recent months, US equities continue to show strength; however, unlike previous months REITs are now trading below their long-term moving averages.

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

september adjusted

september unadjusted

I also provide a “Commission-Free” Ivy Portfolio spreadsheet as an added bonus. 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.

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

commission free

 

commission free2