Mid Week Investment Articles

Below are investment articles I am reading this week:

CAPE, Forward Returns and You – The Reformed Broker

The Many Errors of the Active vs Passive Debate – STA Wealth Management

The Miserable Mangled Mess of Managed Futures – Peter Brandt

When is ‘this time’ really different? Washington Post

A Bubble in Complacency (pdf) – John Mauldin

From ETF.com: ‘Smart Beta’ 6: A Better Definition; A Look at Record Profit Margins; Small Value Funds Aren’t Equal  

Growth Beats Value…but with a lot of help! Alpha Architect (formerly Turnkey Analyst) and also Trusting Your Financial Advisor: Beware of your Behavioral Bias & Behavioral Bias Bingo

Do You Spinu? GestaltU

Investing Using the Price-to-Earnings Ratio and Earnings Yield (Backtests 1951 to 2013) – Greenbackd

Smart Investing is Reality Based – The Big Picture

Dual Momentum ETF Portfolio for May

Scott’s Investments provides a free “Dual ETF Momentum” spreadsheet which was originally created in February 2013. The strategy was inspired by a paper written by Gary Antonacci and available on Optimal Momentum.

The spreadsheet is available here and the objective is to track four pairs of ETFs and provide an “Invested” signal for the ETF in each pair with the highest relative momentum. Invested signals also require positive absolute momentum, hence the term “Dual 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 Quarterly % Total Returns Half Year % Total Returns 1 Year % Total Returns Signal based on 1 year returns Signal based on average returns
US Equities VTI 1.78 5.98 16.26 Invested Invested
International Equities VEU 4.33 5.7 10.2
Cash SHY 0.18 0.32 0.44
Credit Risk ETF Quarterly % Total Returns Half Year % Total Returns 1 Year % Total Returns Signal based on 1 year returns Signal based on average returns
High Yield Bond HYG 2.2 5 5.18 Invested Invested
Interm Credit Bond CIU 1.49 3 1.4
Cash SHY 0.18 0.32 0.44
Real-Estate Risk ETF Quarterly % Total Returns Half Year % Total Returns 1 Year % Total Returns Signal based on 1 year returns Signal based on average returns
Equity REIT VNQ 8.27 14.18 0.82 Invested Invested
Mortgage REIT REM 3.92 15.17 -3.41
Cash SHY 0.18 0.32 0.44
Economic Stress ETF Quarterly % Total Returns Half Year % Total Returns 1 Year % Total Returns Signal based on 1 year returns Signal based on average returns
Gold GLD -2.08 1.34 -7.15
Long-term Treasuries TLT 7.33 11.09 -1.18 Invested
Cash SHY 0.18 0.32 0.44 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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Infinera Maintained Its Momentum Through Q2
Read more on Momentum at Wikinvest

Mid-Week Reads

I am a bit behind this week, the Dual Momentum ETF update will be posted this weekend.

Below is a mid-week reading list:

Gold Prediction – Chris Vermeulen

Big Turnkey Analyst News

Fact, Fiction and Momentum Investing

The Small-Cap Divergence – The Irrelevant Investor

Beware Experts Bearing Predictions – Millennial Invest

Achoo! Bill Gross, PIMCO

Managed Futures: Positive Trends Ahead – PIMCO

From ETF.com – Swedroe:‘Value’ Fueled by Behavior Bias, Rethinking Dividend Strategies, and  Accessing the Profitability Factor; Ferri: 5 Ways to Improve Your Portfolio; Kashner: ‘Smart Beta’ 5: No Alpha Here

Are Valuations Really Too High? (pdf) John Mauldin

High Yield Dividend Champion – May Update

The High Yield Dividend Champion stock portfolio has been updated for May. 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 91%.  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 in an attempt to mitigate concerns over valuation.  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.  Cincinnati Financial (CINF) was sold for a capital gain of 4%+ and an original purchase date of 2/5/14.  Community Trust Bancorp (CTBI) replaces CINF in the portfolio. CTBI is currently ranked eighth using our ranking methodology.

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

Name Symbol Yield Payout 3-yr P/E
Chevron Corp. CVX 3.19 36.10 11.15 11.33
AT&T Inc. T 5.15 53.64 2.33 10.41
Universal Corp. UVV 3.74 39.08 2.08 10.45
Tompkins Financial Corp. TMP 3.39 46.11 5.03 13.59
Eagle Financial Services EFSI 3.30 38.58 3.27 11.68
Old Republic International ORI 4.41 47.10 1.43 10.68
McDonald’s Corp. MCD 3.20 58.80 11.35 18.40
Community Trust Banc. CTBI 3.47 46.21 1.49 13.31
ExxonMobil Corp. XOM 2.70 37.25 12.24 13.82
Weyco Group Inc. WEYS 2.87 44.44 4.13 15.49
Altria Group Inc. MO 4.79 84.96 8.23 17.75
American States Water AWR 2.67 50.63 13.48 18.98
PepsiCo Inc. PEP 3.05 59.28 6.39 19.43
1st Source Corp. SRCE 2.44 31.58 3.69 12.93
Target Corp. TGT 2.79 55.84 23.44 20.05

As previously stated EFSI is not purchased due to its low liquidity.

The current re-balanced portfolio is below:

Position Initial Purchase Date Percentage Gain/Loss Excluding Dividends
CVX 12/6/2012 16.01%
MCD 1/3/2014 4.76%
ORI 4/4/2014 2.96%
UVV 4/5/2012 17.67%
TGT 2/5/2014 8.72%
CTBI 5/5/2014 0.00%
XOM 4/5/2013 15.62%
MO 3/5/2013 15.16%
T 3/6/2014 10.58%
TMP 1/3/2014 -8.79%

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 investment reading list:

GMO’s most recent Quarterly letter is now available. Business Insider also has a summary here.

From ETF.com: 10 Great ETFs You Don’t Know Part 1 and Part 2; Smart Beta 4: Factor Exposure’s Curveball

Barry Ritholtz: Pay close attention to what’s motivating market commentary – The Washington Post

Why Are So Many Boomers Working Longer? ThinkAdvisor

A Yen for a Mortgage (pdf) John Mauldin

Why the Average Investor’s Investment Return Is So Low – Forbes

We are in May – Should we Sell and Go Away? Turnkey Analyst



Ivy & Commission Free ETF Portfolios – May Update

Scott’s Investments provides 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 or trade based on daily updates. 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 April’s closing prices are below.  Equities and REITs continue to show strength although strength is dispersed broadly, with all 10 ETFs above their 10 month moving average.

The table is based on adjusted historical data (unadjusted price data is also available on the spreadsheet). 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 which differ:


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: