Ivy & Commission Free ETF Portfolios – April 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 March’s closing prices are below.  US equities continue to show strength although strength is dispersed broadly, with all 10 ETFs above their 10 month 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:

adjusted

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:

free1

 

free2

ETFReplay Portfolios for April

The ETFReplay.com Portfolio holdings have been updated for April 2014.  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.

Start Algo Trading Here

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 3/31/14 are below:

6mo/3mo/3mo
DBA PowerShares DB Agricultural Commodities
VNQ Vanguard MSCI U.S. REIT
HYG iShares iBoxx High-Yield Corp Bond
LQD iShares iBoxx Invest Grade Bond
PCY PowerShares Emerging Mkts Bond

For April the portfolio maintains positions in DBA, VNQ, and HYG. VTI was sold for a gain of 11.20% after purchasing it originally on 9/30/13. The proceeds were used to purchase iShares iBoxx Invest Grade Bond (LQD).

Beginning in 2014 we 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 solely 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:

6 month Momentum
VTI Vanguard MSCI Total U.S. Stock Market
DBA PowerShares DB Agricultural Commodities
VNQ Vanguard MSCI U.S. REIT
HYG iShares iBoxx High-Yield Corp Bond
EFA iShares MSCI EAFE

For April the portfolio maintains positions in VTI, VNQ and EFA. RWX was sold for a loss of .75% and purchase date of 2/28/14. Proceeds were used to purchase DBA.

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Core ETF Report
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Mid-Week Reads

Below is my mid-week reading list:

Gold’s 3000 Year Backtest – A New World Record! & Is Smart Beta BullSh!+? Turnkey Analyst

Jeremy Grantham: The Fed is Killing the Recovery – Fortune

Beating the Index with Minimum Rules – Following the Trend

Swedroe: Explaining Momentum Factors & Ferri: 3 Big Questions to Ask an Advisor – ETF.com

Minsky’s Financial Instability Hypothesis & China’s Minsky Moment? John Mauldin

Revisiting Two Simple ETF & Mutual Fund Trading Strategies

Two of my most popular posts of all-time are A Very Simple Relative Strength ETF Rotation System and Dual Momentum Investing With Mutual Funds. The simplicity of the systems and ease of implementation are the most appealing aspects of the article and most likely created their popularity.

Today  I revisit both systems, with updated results and modifications. The “Very Simple Relative Strength” system originally  ranked GLD (Gold), SPY (S&P 500), and SHY (Barclays Low Duration Treasury ETF, a close substitute for cash) based 40% on the 3 month return, 30% on the 20 day return, and 30% based on the 20 day volatility.

I modified the test slightly to invest on the close of the next day (for example, i.e. On the close of February 1st 2011, the backtest will invest in the picks from January 31st 2011). 

Using ETFReplay.com, we get the following results from January 1st 2005 to March 21st, 2014 when updating monthly:

Very Simple Original ETFReplay

SHY has low volatility and low potential returns. What if we substitute iShares Barclays 20+ Yr Treasury Bond ETF (TLT) for SHY?

The results are below:

Very Simple ETFReplay2

We can also test this system using Portfolio123.  Using a 4-week rebalance and the next day’s opening price (as opposed to end of the month and next day’s closing price) we get similar results:

Very Simple P123

The second system, Dual Momentum Investing with Mutual Funds, purchases one mutual fund in 3 sub-portfolios and equal weights the three portfolios to create a “complete” portfolio. Purchases are determined by the one fund in each portfolio which has the highest trailing 6 month returns. The strategy rebalances each month, selling the current holding if it is no longer the top ranked fund in its portfolio and replacing it with the fund which has the highest momentum.

The first portfolio is an equity portfolio consisting of the following:

Vanguard Emerging Markets – VEIEX

Vanguard Short-Term Treasury – VFISX

Vanguard Total Stock Market – VTSMX

The second portfolio is a bond portfolio consisting of the following:

T. Rowe Price Emerging Markets Bond – PREMX

Vanguard Long-Term Investment Grade – VWESX

Vanguard Short-Term Treasury – VFISX

The third portfolio is a real asset portfolio consisting of the following:

Vanguard Short-Term Treasury – VFISX

Vanguard Precious Metals & Mining – VGPMX

Vanguard REIT – VGSIX

The benchmark for the tests is the Vanguard 60-40 Balanced Fund (VBINX) which offers a better representation of  a complete portfolio when compared to a pure equity benchmark like SPY.  The strategy detailed above has offered strong historical returns since 2003, at comparable volatility and much lower drawdowns compared to a balanced 60/40 mutual fund. Also note the Sharpe Ratio in excess of 1:

Dual Momentum with Mutual Funds

 

However, as I noted in 2012, the system has underwhelmed since 2010:

Dual Momentum with Mutual Funds 2010

 

Simplicity, while not always sexy, can offer tangible investment strategies for strong risk-adjusted returns. These two systems are not meant to be optimal and there are many worthy alternatives and variations. They may under-perform buy-and-hold investments for extended periods of time and past results are no guarantee of future returns.  However, they still demonstrate potential alternatives to buy-and-hold.

Sunday Readings

Below is my Sunday night investment reading list:

The problem with 401(k)s, dear reader, is you. Washington Post

A Man and His Signals – The Reformed Broker

This Undervalued Energy Stock Could Soar

The Black Box: Eyewitness Testimony and Investment Models – Gestaltu

Swedroe: Unpacking Buffett’s Genius & The Perils of the Carry Trade & Mulrane: A Risk Parity Plan Using ETFs – IndexUniverse

Free Trend Following Trading System Rules – Following the Trend

Are You Trying Too Hard – Turnkey Analyst

Seth Klarman: Investors Downplaying Risk “Never Turns Out Well” and Income Inequality and Social Mobility – John Mauldin

 

Dual Momentum ETF Portfolio

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 23.81 13.96 Invested Invested
International Equities VEU 8.93 5.3
Cash SHY 0.31 0.27
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 6.1 5.12 Invested Invested
Interm Credit Bond CIU 1.02 1.92
Cash SHY 0.31 0.27
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 4.82 7.45 Invested Invested
Mortgage REIT REM -5.83 7.15
Cash SHY 0.31 0.27
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 -15.12 -2.87
Long-term Treasuries TLT -4.55 1.48 Invested
Cash SHY 0.31 0.27 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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March High Yield Dividend Champion Portfolio

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.”

This Undervalued Energy Stock Could Soar

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 82%.  I mentioned in the 2013 year in review that valuation of high yield stocks was a concern. 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, however they rebounded in February, with SPY up over 7% in a month.

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 one position this month. American States Water (AWR) is being sold at a capital gain of 12.99% and original purchase date of 7/5/13.

Proceeds from the sales will be used to purchase AT&T (T), which is currently the second highest rated stock on the list..

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

Name Symbol Yield Payout 3-yr P/E
Chevron Corp. CVX 3.47 36.10 11.15 10.41
AT&T Inc. T 5.76 54.12 2.33 9.40
Eagle Financial Services EFSI 3.30 36.19 3.27 10.95
Old Republic International ORI 4.69 47.40 1.43 10.10
Universal Corp. UVV 3.54 39.08 2.08 11.04
Tompkins Financial Corp. TMP 3.30 46.11 5.03 13.97
ExxonMobil Corp. XOM 2.61 34.19 12.24 13.08
McDonald’s Corp. MCD 3.41 58.38 11.35 17.14
Community Trust Banc. CTBI 3.23 44.44 1.49 13.75
Helmerich & Payne Inc. HP 2.53 36.98 80.79 14.61
Altria Group Inc. MO 5.29 84.96 8.23 16.05
Target Corp. TGT 2.75 46.11 23.44 16.77
Wal-Mart Stores Inc. WMT 2.57 39.59 15.27 15.40
Cincinnati Financial CINF 3.75 56.23 1.19 14.98
PepsiCo Inc. PEP 3.27 60.65 6.39 18.53

The current portfolio is below:

Position Purchase Price Purchase Date Percentage Gain/Loss Excluding Dividends
CVX 106.45 12/6/2012 7.89%
MCD 96.54 1/3/2014 -0.99%
HP 65.48 7/5/2013 53.97%
UVV 45.55 4/5/2012 27.93%
TGT 55.07 2/5/2014 10.30%
CINF 47.1 2/5/2014 1.17%
XOM 89.01 4/5/2013 5.34%
MO 34.24 3/5/2013 7.74%
T 32.34 3/6/2014 0.00%
TMP 50.3 1/3/2014 -1.63%

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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Tuesday Readings

Below is my reading list for this week:

Inner-Investor Outlook March 2014

Are Simple Momentum Strategies Too Dumb? Introducing Probabilistic Momentum – CSS Analytics

From ETF.com (formerly IndexUniverse):The New ‘Effective’ Frontier, Volatility & Corrosive Contango, Dividends and Behavioral Econ

The Second Coming – PIMCO

Worst Value Opportunity Set in 25 Years – Greenbackd

Black Swans & Endogenous Uncertainty and Buffett’s annual letter: What you can learn from my real estate investments – John Mauldin

Is the Stock Market Cheap? Advisor Perspectives

James Montier has a new white paper available at GMO’s site (free registration required)

 

ETFReplay Portfolios for March

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.

Start Algo Trading Here

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 2/28/14 are below:

6mo/3mo/3mo
VNQ Vanguard MSCI U.S. REIT
DBA PowerShares DB Agricultural Commodities
VTI Vanguard MSCI Total U.S. Stock Market
HYG iShares iBoxx High-Yield Corp Bond (4-5yr)
EFA iShares MSCI EAFE

For March the portfolio maintains positions in VTI and HYG. LQD was sold for a gain of 2.78% and SHY was sold for a gain of .01%. The proceeds were used to purchase VNQ and DBA.

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:

6 month Momentum
VTI Vanguard MSCI Total U.S. Stock Market
EFA iShares MSCI EAFE
VNQ Vanguard MSCI U.S. REIT
RWX SPDR DJ International Real Estate
DBA PowerShares DB Agricultural Commodities

For March the portfolio maintains positions in VTI and EFA.  LQD and HYG were sold for gains of .88% and 1.8% and the proceeds used to purchase VNQ and RWX.

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Ivy & Commission Free ETF Portfolios – March 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 February’s closing prices are below.  US equities continue to show strength although several other asset classes 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

 

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