ETFReplay Portfolio for May

The ETFReplay.com Portfolio holdings have been updated for May 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 4/30/14 are below:

6mo/3mo/3mo
DBA PowerShares DB Agricultural Commodities
VNQ Vanguard MSCI U.S. REIT
VTI Vanguard Total U.S. Stock Market
LQD iShares iBoxx Invest Grade Bond
PCY PowerShares Emerging Mkts Bond

The portfolio maintains positions in DBA, VNQ, and LQD for the month of May. HYG was sold for a gain of 0.97% after purchasing it originally on 10/31/13. The proceeds were used to purchase Vanguard Total U.S. Stock Market (VTI).

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
DBA PowerShares DB Agricultural Commodities
VTI Vanguard Total U.S. Stock Market
VNQ Vanguard MSCI U.S. REIT
TLT iShares Barclays Long-Term Trsry
LQD iShares iBoxx Invest Grade Bond

For May the portfolio maintains positions in VTI, VNQ and DBA. EFA was sold for a gain of 1.82% and purchase date of 12/31/13. Proceeds were used to purchase iShares Barclays Long-Term Treasury ETF (TLT).

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Core ETF Report
US Market ETF Trading Map
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Hedging the Graham Value Stock Portfolio

A reader asked if hedging helped reduce drawdowns in the Graham Value Stock portfolio. The portfolio, like many long strategies, suffered significant drawdowns in 2008.

I used Portfolio123 to back-test two modifications to the strategy.  All tests re-rank stocks every 3-months, selling those that no longer qualify and replacing them with the highest rated stocks, assume .50% slippage, and cover the time period of 1/2/99 – 4/27/14.

First, let’s review the baseline backtest for the un-hedged version of the stratgegy.  The test below has different re-balance dates than the portfolio update from mid-April and therefore slightly different results. However, it serves as a consistent comparison for the two hedged portfolios:

grahambase

Next, we sell all stocks in the Graham Value strategy and goes to cash when the 50 day moving average of the SPDR S&P 500 ETF (SPY) crosses below its 200 day moving average. Stocks are re-purchased when the 50 day moving average of SPY is above its 200 day moving average on the re-rank date. This hedge “re-ranks” on the same 3-month frequency as the stocks in the strategy. Thus, it could conceivably keep an investor in cash for 3 months. Interim signals (50 day SMA crossing over/under 200 day SMA) are ignored and only honored on the re-rank date:

grahamcrossover

The last strategy uses a 15% entry-based stop loss. Stocks are sold when they trade at or below -15% of their purchase price. The resulting proceeds are held as cash until the next re-rank date.  Thus, the portfolio could hold significant amounts of cash if several stocks are stopped out:

grahamstoploss

There are a number of variations which could be applied to hedge the portfolio. The two listed above are not intended as recommendations or optimal, but as a demonstration of the material impact risk-management can have on an investment strategy. In both cases drawdowns were reduced, and in the crossover strategy total returns and sharpe ratio were also negatively impacted. The stop-loss strategy had slightly lower total returns but a higher sharpe ratio.

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Chris Hedges: “America is a Tinderbox”
New ETF Hedges Foreign Exposure
Read more on Value Investing, Hedging at Wikinvest

Weekend Investment Readings

Below is my weekend reading list:

Stop Sabotaging Your Investments – MarketWatch

Software is Eating Investment Management & Active vs Passive – Abnormal Returns

Do Commodities Belong in Your Allocation? Advisor Perspectives

Dare to be Great II (pdf) John Mauldin

Larry Swedroe (ETF.com): Fixed Income’s Low-Risk Anomaly, Looking at Value Premiums Part 1 and 2.

4 Keys to Picking the Right ETF – ETF.com

Still Believe in Efficient Markets? Pension Partners

Silver Forecast – The Gold and Oil Guy

 

Graham Value Stock Portfolio Update

In January 2012 I announced a new portfolio, a Benjamin Graham “inspired” value stock portfolio.  The purpose of the hypothetical portfolio is to track returns for a portfolio of 15 stocks selected based on a variety of valuation metrics. I originally intended to update the portfolio monthly; however, in the spirit of creating a lower turnover, value-driven portfolio it is now updated quarterly.

I have also added an additional criteria to limit turnover in the portfolio (see below). The Graham portfolio is an attempt to add a value strategy to Scott’s Investments, which is otherwise focused on momentum, trend, income and market timing strategies.

The criteria used to select the stocks are listed below.  The tool used to perform the screen and backtests are courtesy of  Portfolio123 (“P123″).

The actual screen factors are below:

  • Liquidity filter: No OTC Stocks
  • Market capitalization > $100 million
  • Eliminate companies classified in the Miscellaneous Financial Services Industry, most of which are investment companies and funds and not the kind of stocks this all-star tended to seek
  • Current ratio must be at least 1.5
  • Long-term debt must be no higher than 10% above working capital
  • EPS must be above breakeven in each of the last four quarters and in each of the last five annual periods
  • Trailing 12 month EPS most be above EPS in the latest annual period
  • EPS in the latest annual period must be above EPS in the prior year and five years ago
  • The company must have paid common dividends in the last 12 months

The ranking system used as a basis for selecting the top 15 based among those stocks that pass the Graham screen are below:

  • Valuation – 60% of total
  • Trailing 12 month P/E (15% of this category)
  • Price-to-Book (15% of this category)
  • Price-to-Tangible Book Value (35% of this category)
  • Operating P/E, defined as Market Capitalization divided by Business Income, which is Sales minus Cost of Goods sold minus Selling, General & Administrative Expense and omits unusual items (35% of this category)
  • Earnings – 40% of total
  • 5-year EPS Growth Rate (50% of this category)
  • EPS Stability, defined as the standard deviation of EPS over the past 16 quarters, lower being better (50% of this category)

Stocks will now be sold when they drop below the 75th percentile ranking based on the ranking system above. Improvements in the screening and testing platform (via Portfolio123) allows a change in the sell/turnover rule from previous updates.

I began tracking this portfolio real-time on January 13th, 2012. As of April 15th, 2014 it is up over 43%. A real-world application of this portfolio could also utilize stop losses in order to prevent large drawdowns in single positions. However, for the purposes of tracking the portfolio results, all positions are bought and held until rebalancing.

Below is a 14+ year backtest results for this screen  using a quarterly rebalance and .50% slippage to help account for bid/ask spreads. Backtests include the 75th percentile sell rule (stocks will only be sold when they drop below the 75th percentile ranking):

(test data courtesy of Portfolio123)

Graham

graham2
The stocks being sold 4/15/2014 are listed below:

Symbol Name Purchase Date  Percentage Gain/Loss
AGU Agrium 1/15/2014 -1.72%
AGI Alamos Gold Inc 4/15/2013 -9.38%
CVI CVR Energy 1/15/2014 13.08%
HP Helmerich & Payne Inc. 7/17/2012 145.17%
CVX Chevron 1/15/2014 0.94%
TESS TESSCO Technologies Inc 7/17/2012 62.17%
CF CF Industries Holdings Inc 1/15/2013 10.99%

The current portfolio is listed below.

Symbol Name
BGFV* Big 5 Sporting Goods Corp
BWC* The Babcock & Wilcox Company
HFC HollyFrontier Corp
CHRM Charm Communications
CLMS* Calamos Asset Management Inc.
CSH* Cash America International
CTCM* CTC Media, Inc
HUM Humana
JST Jinpan International
SWM Schweitzer-Mauduit Intl Inc
WMK Weis Markets Inc.
RCKY Rocky Brands
SCVL Shoe Carnival Inc.
DDS* Dillard’s Inc.
KALU* Kaiser Aluminum Corporation

*new position as of 4/15/2014

Monday Readings

From ETF.com – Faber: Own Most-Beaten-Down Stocks, Swedroe: Quality Factor in Global Scope, Destroying Smart Beta: Part 1

Quant Tools Field of Dreams – Turnkey Analyst

A Study in Diversification – Following the Trend

PIMCO’s Bill Gross Picks Up the Pieces – Businessweek

Every Central Bank for Itself (pdf), Risk On, Regardless – John Mauldin

Cluster Shrinkage – GestaltU

Dual Momentum ETF Portfolio

In February 2013 I created a  “Dual ETF Momentum” spreadsheet. The strategy 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 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 Invested
Cash SHY 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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euNetworks Sees Growing Sales Momentum
How to Spot a Genuine Momentum Stock
Infinera Maintained Its Momentum Through Q2
Read more on Momentum at Wikinvest

April High Yield Dividend Champion Portfolio

The High Yield Dividend Champion stock portfolio has been updated for April. 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.”

Looking for a Hedged Version and a larger pool of stocks? Visit Portfolio123

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 85%.  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.”

I added a valuation filter to the portfolio starting in 2014.  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 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.  Helmerich & Payne Inc. (HP) was sold for a capital gain of 63%+ and an original purchase date of 7/5/13. The yield for HP has dropped below the minimum threshold as a result of its significant price increase in recent months. Old Republic International (ORI) replaces HP. It is currently ranked fourth using our ranking methodology.

The portfolio has now grown to a point where rebalancing positions is a concern.  The sale of HP generated over $30,000 in a $187,000+ portfolio.  The question becomes whether we put all of the proceeds into the new position, ORI, making it the largest holding, or allocate to both ORI and existing positions for a more balanced allocation.  The original portfolio allocated evenly among 10 positions. It is intended to be a real-world example of a mechanical investing system, so I have not rebalanced to this point to keep potential real-world fees and taxes to a minimum.

Given the size of the HP transaction, now would be an optimal time to balance the system.  To keep commissions and taxes to a minimum, I will not be selling any other positions in the portfolio. Rather, we will  use cash generated from HP to allocate approximately 10% of the portfolio to ORI, and we will purchase additional shares of the portfolio’s 4 smallest holdings – CVX, MO, UVV, and TMP.

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

Name Symbol Yield Payout 3-yr P/E
Chevron Corp. CVX 3.36 36.10 11.15 10.73
AT&T Inc. T 5.25 54.12 2.33 10.31
Universal Corp. UVV 3.65 39.08 2.08 10.71
Old Republic International ORI 4.45 47.40 1.43 10.65
Eagle Financial Services EFSI 3.30 36.19 3.27 10.95
Tompkins Financial Corp. TMP 3.27 46.11 5.03 14.11
McDonald’s Corp. MCD 3.31 58.38 11.35 17.66
ExxonMobil Corp. XOM 2.58 34.19 12.24 13.25
Altria Group Inc. MO 5.13 84.96 8.23 16.56
Community Trust Banc. CTBI 3.09 44.44 1.49 14.40
Wal-Mart Stores Inc. WMT 2.51 39.59 15.27 15.76
Cincinnati Financial CINF 3.62 56.23 1.19 15.55
Target Corp. TGT 2.84 55.84 23.44 19.65
Weyco Group Inc. WEYS 2.66 44.44 4.13 16.68
PepsiCo Inc. PEP 3.14 60.65 6.39 19.33

The current re-balanced portfolio is below:

 

Position Shares Average Purchase Price Initial Purchase Date Cost Basis Current Value Percentage Gain/Loss Excluding Dividends
CVX 138 108.06 12/6/2012 $14,912.28 $16,394.40 9.94%
MCD 167 96.54 1/3/2014 $16,122.18 $16,344.29 1.38%
ORI 1145 16.22 4/4/2014 $18,571.90 $18,571.90 0.00%
UVV 332 46.47 4/5/2012 $15,428.04 $17,781.92 15.26%
TGT 321 55.07 2/5/2014 $17,677.47 $19,625.94 11.02%
CINF 375 47.1 2/5/2014 $17,662.50 $18,071.25 2.31%
XOM 196 89.01 4/5/2013 $17,445.96 $19,082.56 9.38%
MO 449 34.64 3/5/2013 $15,553.36 $16,868.93 8.46%
T 663 32.34 3/6/2014 $21,441.42 $23,569.65 9.93%
TMP 362 50.16 1/3/2014 $18,157.92 $17,759.72 -2.19%

$3613 will be kept in cash in case rebalancing is needed in the near future.

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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7 Higher Yield Dividend Growth Stocks
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Read more on Dividend Investing at Wikinvest

Thursday Reads

Below is my investment reading list for this week:

From ETF.com:

Swedroe: A Closer Look at CAPE Ratio
Swedroe: Beware Lure of Market Timing
ETF Expense Ratios Don’t Matter

Why ETFs are More Tax Efficient than Mutual Funds & Do Rituals Make You a Better Investor – Turnkey Analyst

The Best and Worst Things About Investing – The Reformed Broker

Is the Stock Market Cheap? & The Evolution of Optimal Lookback Horizon – Advisor Perspectives

Are Stocks Pricey or Cheap? The Big Picture

Why Value Investing is So Hard (Russian Edition) – Meb Faber