Weekend Reads

Below is my weekend investment reading list.  For those who missed it, take a moment to read my review of Following the Trend.

From ETF.com: Swedroe On The Dividend-ETF TrapSwedroe: Behind Low-Vol SuccessFerri: What Was John Bogle Thinking?

Gestaltu: Faber’s Ivy Portfolio: As Simple as Possible, But No Simpler

Mebane Faber’s top read of the year

Understanding the Controversy over Dividend-Based Investing – Advisor Perspectives

The Best Investment Advice You’ll Never Get – Barry Ritholtz

The Pursuit of Useless Information – Turnkey Analyst

Following the Trend: A Book Review

I have been a long-time advocate and fan of trend following strategies.  I have read countless trend trading books, only a handful of which have made a true and lasting impact on my investing perspective. Andreas F. Clenow’s Following The Trend: Diversified Managed Futures Trading (book website here) can now be added to my short-list of must-read trading books.

The book is actually directed towards aspiring futures fund managers and professional traders.  However, it also offers a wealth of applicable information for individual investors and traders and provides numerous insights into specific trend-trading strategies. I have read very few books that have covered all of the nuanced components of trend-trading in such a seamless, accessible manner.

Topics covered include trend strategies (and why the actual buy and sell signals are of secondary importance), the importance of accurate data sources, potential markets to trade, where to place stop losses, how to manage overall portfolio risk, cash management, mitigating counter-party risk (think MF Global), position sizing, and other tangible strategy and portfolio considerations. The importance of risk management is a reoccurring theme throughout Following the Trend. Clenow provides multiple formulas for calculating proper position sizing and stop losses.

The most interesting chapter is dedicated to reverse engineering popular futures funds. The author uses a basic trend trading strategy (the one he details in the book ) to reverse engineer some of the largest and most successful futures funds. The book’s strategy is highly correlated with some of the industry’s heavyweight funds. In other words, basic trend strategies with proper risk management is applied industry wide.  Each fund has its own unique approach and minor strategy differences, but the key point is there is no “secret sauce” or mysterious black-box magical formula.

Following the Trend has no fluff or filler – it is pure content and walks readers through a specific trend trading strategy step by step. Despite targeting professionals, the book is accessible to individual investors. if you come to the book with a basic understanding of investing terms and instruments then you will come away with a greater understanding of trend trading.

Dual Momentum ETF Portfolio Update

In February 2013 I announced a  “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.

An “average” return signal for each ETF is also available 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.

Portfolio123 was used to test a similar strategy using the same portfolios and combined momentum score (“3/6/12″).  The test results were posted in the 2013 Year in Review.

Below are the four portfolios along with current signals:

Return data courtesy of Finviz
Equity ETF 1 Year % Total Returns Average of Quarterly/ Half/Full Year % Returns Signal based on 1 year returns Signal based on average returns
US Equities VTI 21.83 11.15 Invested Invested
International Equities VEU 7.34 3.59
Cash SHY 0.36 0.25
Credit Risk ETF 1 Year % Total Returns Average of Quarterly/ Half/Full Year % Returns Signal based on 1 year returns Signal based on average returns
High Yield Bond HYG 6.8 4.64 Invested Invested
Interm Credit Bond CIU 1.2 1.49
Cash SHY 0.36 0.25
Real-Estate Risk ETF 1 Year % Total Returns Average of Quarterly/ Half/Full Year % Returns Signal based on 1 year returns Signal based on average returns
Equity REIT VNQ 3.71 2.93 Invested
Mortgage REIT REM -4.1 4.29 Invested
Cash SHY 0.36 0.25
Economic Stress ETF 1 Year % Total Returns Average of Quarterly/ Half/Full Year % Returns Signal based on 1 year returns Signal based on average returns
Gold GLD -23.92 -9.87
Long-term Treasuries TLT -5.75 -0.75
Cash SHY 0.36 0.25 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.

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Weekend Reads

Below is my weekend reading list (I have some catching up to do!):

Inner-Investor Outlook February 2014

GMO’s quarterly letter is available (free registration required). Always a must-read

The Psychology of Scarcity and Rebalancing: Less is More? Turnkey Analyst

Most ‘Medieval’ – Bill Gross, PIMCO

Valuation Based Equity Market Forecast – Advisor Perspectives

Swedroe: The Absolute Return Rip-Off – Index Universe

Retiring on Your Own Terms – Jason Zweig

 Toward a Simpler Palate – GestaltU

A Field Guide to Stock Market Corrections – Reformed Broker

Challenging the Consensus (pdf) and Central Banker Throwdown (pdf) – John Mauldin

February High Yield Dividend Champion

The High Yield Dividend Champion stock portfolio has been updated for February. The portfolio is tracked publicly as a continuous hypothetical portfolio with a starting balance of $100,000 on Scott’s Investments.

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.

To date the portfolio is up over 66%.  I mentioned in the 2013 year in review that valuation of high yield stocks was a concern (see World Beta and O’Shaughnessy). In January’s update I noted that “I have lowered my expectations for future returns of US equities and high yield stocks.” January was not kind to US equities. The High Yield Dividend Champion Portfolio had an approximate 4% drawdown since the last update.

I added a valuation filter to the portfolio starting last month.  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 relatively “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 price-earnings (P/E) ratio.  Extra weight is given to yield and payout ratio rankings.  The 5/10 year Dividend Acceleration/Deceleration metric will no longer be used (5-year average increase divided by 10-year average increase)

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.

There is turnover in two positions this month. UGI Corp (UGI) is being sold at a capital loss of 1.48% and original purchase date of 8/5/13. Leggett & Platt (LEG) is being sold at a capital loss of 7.47% and original purchase date of 8/5/13.

Proceeds from the sales will be used to purchase Target (TGT) and Cincinnati Financial (CINF). It should be noted that Eagle Financial Services (EFSI) is rated higher than both stocks but due to its low liquidity it was eliminated from consideration.

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

Name Symbol Yield Payout 3-yr P/E
Chevron Corp. CVX 3.58 32.73 11.15 9.14
Universal Corp. UVV 3.98 39.92 2.08 10.04
Eagle Financial Services EFSI 3.44 37.44 3.27 10.89
Target Corp. TGT 3.04 46.11 23.44 15.18
Helmerich & Payne Inc. HP 2.84 37.59 80.79 13.24
Tompkins Financial Corp. TMP 3.41 48.78 5.03 14.30
ExxonMobil Corp. XOM 2.73 32.94 12.24 12.05
McDonald’s Corp. MCD 3.44 58.38 11.35 16.97
Altria Group Inc. MO 5.45 75.00 8.23 13.76
Cincinnati Financial CINF 3.63 49.44 1.19 13.61
Community Trust Banc. CTBI 3.16 44.44 1.49 14.07
American States Water AWR 2.85 51.59 13.48 18.09
Old Republic International ORI 4.61 63.16 1.43 13.70
Johnson & Johnson JNJ 2.98 54.89 7.07 18.39
Weyco Group Inc. WEYS 2.73 42.35 4.13 15.54

The current portfolio is below:

Position Purchase Price Purchase Date
CVX 106.45 12/6/2012
MCD 96.54 1/3/2014
HP 65.48 7/5/2013
UVV 45.55 4/5/2012
TGT 55.07 2/5/2014
CINF 47.1 2/5/2014
XOM 89.01 4/5/2013
MO 34.24 3/5/2013
AWR 27.25 7/5/2013
TMP 50.3 1/3/2014

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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ETFReplay Portfolios for February

Among the more popular portfolios on Scott’s Investments has been the ETFReplay.com Portfolio.  I previously detailed here and here how an investor can use ETFReplay.com to screen for best performing ETFs based on momentum and volatility.

The portfolio begins with a static basket of 15 ETFs. These 15 ETFs are ranked by 6 month total returns (weighted 40%), 3 month total returns (weighted 30%), and 3 month price volatility (weighted 30%). The top 4 are purchased  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.

Gold and Silver Ready to Rumble Higher?

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 based on the 6/3/3 system as off 1/31/14 are below:

LQD iShares iBoxx Invest Grade Bond
VTI Vanguard MSCI Total U.S. Stock Market
HYG iShares iBoxx High-Yield Corp Bond
SHY Barclays Low Duration Treasury
TLT iShares Barclays Long-Term Trsry

For February the portfolio maintains positions in VTI, HYG and LQD. EFA was sold for a loss of 0.30% and the proceeds used to purchase SHY.

Beginning in 2014 we will track both the 6/3/3 strategy (same system as 2013) as well as the pure momentum system, which will rank the same basket of 15 ETFs based only on 6 month price momentum. There is no cash filter in the pure momentum system, volatility ranking, or requirement to limit turnover – the top 4 ETFs based on price momentum will be purchased each month. The portfolio and rankings will be posted on the same spreadsheet as the 6/3/3 strategy.

The top 5 six month momentum ETFs are below:

VTI Vanguard MSCI Total U.S. Stock Market
LQD iShares iBoxx Invest Grade Bond
HYG iShares iBoxx High-Yield Corp Bond
TLT iShares Barclays Long-Term Trsry

For February the portfolio maintains positions in VTI and EFA.  EEM and RWX were sold for losses of 8.61% and 4.17% and the proceeds used to purchase LQD and HYG.

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Ivy & Commission Free ETF Portfolios – February Update

Early in 2012  Scott’s Investments added a daily Ivy Portfolio spreadsheet to track the 10 month moving average signals for two 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 January’s closing prices are below. Despite their recent pullback, US equities continue to show strength although bonds have rallied above their 10 month simple moving average.

The first table is based on adjusted historical data and the second table is based on unadjusted price data. Adjusted data is my preferred method for averaging prices; however, if you use a charting or financial site which uses unadjusted prices you may see moving average signals closer to those in the unadjusted table:

ivy february

ivy 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