Tag Archives: eem

ETFReplay.com July Update

The ETFReplay.com Portfolio holdings have been updated for July 2015.  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 14 ETFs. These 14 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.

The 14 ETFs are listed below:

Symbol Name
RWX SPDR DJ International Real Estate
PCY PowerShares Emerging Mkts Bond
WIP SPDR Int’l Govt Infl-Protect Bond
EFA iShares MSCI EAFE
HYG iShares iBoxx High-Yield Corp Bond
EEM iShares MSCI Emerging Markets
LQD iShares iBoxx Invest Grade Bond
VNQ Vanguard MSCI U.S. REIT
TIP iShares Barclays TIPS
VTI Vanguard MSCI Total U.S. Stock Market
DBC PowerShares DB Commodity Index
GLD SPDR Gold Shares
TLT iShares Barclays Long-Term Trsry
SHY iShares Barclays 1-3 Year Treasry Bnd Fd

 

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In addition, ETFs must be ranked above the cash-like 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 cash filter is in effect this month.  SHY is the highest rated ETF in the 6/3/3 system.  Therefore, all current holdings will be sold and the proceeds used to purchase SHY.

The top 5 ranked ETFs based on the 6/3/3 system as of 6/30/15 are below:

6mo/3mo/3mo
SHY Barclays Low Duration Treasury (2-yr)
EFA iShares MSCI EAFE
HYG iShares iBoxx High-Yield Corp Bond (4-5yr)
PCY PowerShares Emerging Mkts Bond (7-9yr)
VTI Vanguard Total U.S. Stock Market

 

In 2014 I introduced a pure momentum system, which ranks the same basket of 14 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 are purchased each month. The portfolio and rankings are posted on the same spreadsheet as the 6/3/3 strategy.

The top 4 six month momentum ETFs are below:

6 month Momentum
EFA iShares MSCI EAFE
EEM iShares MSCI Emerging Markets
RWX SPDR DJ International Real Estate
HYG iShares iBoxx High-Yield Corp Bond (4-5yr)

 

(VTI), a holding since September 2014 will be sold for a 5%+ gain and replaced by (EEM).  (TLT), a holding since September 2014 will be sold for a  1%+ gain and replaced by (HYG).

The updated holdings for each portfolio are below.

6/3/3 strategy:

Position Shares Avg Purchase Price Purchase Date Cost Basis Current Value Gain/Loss Excluding Dividends Percentage Gain/Loss Excluding Dividends
SHY 149 84.86 5/29/2015 & 6/30/15 $12,644.14 $12,644.14 $0.00 0.00%

 

Pure Momentum strategy:

Current Positions Position Shares Purchase Price Purchase Date Cost Basis Current Value Gain/Loss Excluding Dividends Percentage Gain/Loss Excluding Dividends
EEM 60 39.62 6/30/2015 $2,377.20 $2,377.20 $0.00 0.00%
RWX 64 43.99 4/2/2015 $2,815.36 $2,679.04 -$136.32 -4.84%
HYG 27 88.8 6/30/2015 $2,397.60 $2,397.60 $0.00 0.00%
EFA 39 66.51 4/30/2015 $2,593.89 $2,476.11 -$117.78 -4.54%

ETFReplay.com Portfolio – February Update

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. Previously, the static basket of ETFs was 25. This number of ETFs creates a high degree of turnover and also creates cross-over among ETFs that have a high correlations. For example, if you are only purchasing 4 ETFs each month and 2 or 3 of the ETFs are highly correlated, there is little benefit in holding more than 1 of the ETFs.

For 2013 the static basket of ETFs has been reduced to 15. From this basket of 15, the top 4 will be selected 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). I will no longer combine these rankings with the rankings based on a combination of 3 month returns, 20 day returns, and 20 day volatility.

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).

The top 5 ranked ETFs as of 1/31/13 are:

EFA iShares MSCI EAFE
RWX SPDR DJ International Real Estate
WIP SPDR Int’l Govt Infl-Protect Bond (9-10yr)
VNQ Vanguard MSCI U.S. REIT
EEM iShares MSCI Emerging Markets

The position in PowerShares Emerging Mkts Bond (PCY) was closed for a gain of 5.45% (excluding dividends) and an open trade date of June 29th, 2013. PCY is being replaced by iShares MSCI EAFE (EFA), which has catapulted to the top ranking.

The four current positions are below:

Position Purchase Price Purchase Date Percentage Gain/Loss Excluding Dividends
RWX 40.74 10/31/2012 2.04%
EFA 58.98 1/31/2013 0.00%
WIP 63.15 11/30/2012 0.59%
EEM 44.35 12/31/2012 -0.29%
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ETFReplay.com Portfolio Update – Strategy Modification

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. Previously, the static basket of ETFs was 25. This number of ETFs creates a high degree of turnover and also creates cross-over among ETFs that have a high correlations. For example, if you are only purchasing 4 ETFs each month and 2 or 3 of the ETFs are highly correlated, there is little benefit in holding more than 1 of the ETFs.

For 2013 the static basket of ETFs has been reduced to 14. From this basket of 14, the top 4 will be selected 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). I will no longer combine these rankings with the rankings based on a combination of 3 month returns, 20 day returns, and 20 day volatility.

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).

The 14 ETFs I will screen each month are below:

Symbol Name
RWX SPDR DJ International Real Estate
PCY PowerShares Emerging Mkts Bond
WIP SPDR Int’l Govt Infl-Protect Bond
EFA iShares MSCI EAFE
HYG iShares iBoxx High-Yield Corp Bond
EEM iShares MSCI Emerging Markets
LQD iShares iBoxx Invest Grade Bond
VNQ Vanguard MSCI U.S. REIT
TIP iShares Barclays TIPS
VTI Vanguard MSCI Total U.S. Stock Market
DBC PowerShares DB Commodity Index
GLD SPDR Gold Shares
DBA PowerShares DB Agricultural Commodities
TLT iShares Barclays Long-Term Trsry

The top 4 ETFs as of 12/31/12 were:

Symbol Name
RWX SPDR DJ International Real Estate
PCY PowerShares Emerging Mkts Bond
WIP SPDR Int’l Govt Infl-Protect Bond
EEM iShares MSCI Emerging Markets

Only one position is new, EEM. The position in PowerShares DB G10 Currency Harvest (DBV) which was dropped from the list of 14 ETFs, will be sold and replaced with EEM for January 2013.

Testing the Harry Browne Permanent Portfolio with Emerging Markets

In response to my Harry Browne Permanent ETF Portfolio article from last week, David Jackson of Seeking Alpha wondered if the portfolio had been tested with Emerging Markets ETFs as opposed to US equities. His theory is the Emerging Markets have added beta over US stocks and may perform better in the future due to higher expected GDP growth.

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I created a second Harry Browne Permanent ETF Portfolio in ETF Replay and then used their platform to test the results.  The portfolio consists of a 25% equal allocation to EEM (MSCI Emerging Markets Index Fund), TLT (iShares Barclays 20+ Year Treasury), SHY (iShares Barclays 1-3 Year Treasury Bond Fund), and GLD (SPDR Gold Trust).   This allocation is identical to the portfolio in my “original” Harry Browne portfolio with one exception: EEM has been substituted for SPY (SPDR S&P 500 ETF).

If an investor bought the Emerging Markets Permanent Portfolio on January 3rd, 2005 and held until February 17th, 2012, the total return was 128.4% (12.3% CAGR) and 12.7% volatility (all returns discussed exclude commissions, taxes, and slippage). The original Harry Browne Portfolio (SPY/SHY/TLT/GLD) would have returned 105.6% (10.7% CAGR) at 9.3% volatility:

The max drawdown on the Emerging Market Permanent portfolio was 26.15% versus 16.17% for the original version.  The increased volatility and drawdown of the Emerging Market version is not surprising since emerging market equities have traditionally had higher volatility than large cap US equities.

In my original article I also tested the 10 month moving average system popularized in recent years by Mebane Faber in The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets. When an ETF in the portfolio was below its 10 month moving average at month-end, the position was sold and held in “cash” (SHY was used as a substitute for cash). When it closed the month above its 10 month moving average, the ETF was purchased at the stated allocation.

To properly test the moving average system I had to begin the test at the beginning of 2006 since GLD did not have adequate trading history to generate a 10 month moving average in 2005.  In order to properly compare strategies (moving average vs. buy and hold) we first need to show the results for buying and holding the portfolios over the same time period of 2006-present (portfolio A is the Emerging Markets version, Portfolio B is the original):

We see that the Emerging Markets version had a total return of 90.5% (11.1% CAGR). .63 sharpe ration, and 12% volatility. The original version had a total return of 81.1% (10.2% CAGR), .73 sharpe ratio, and 9.2% volatility.

For the first 10 month moving average test we will revisit the original Harry Browne ETF Portfolio (SPY/SHY/TLT/GLD). When we test the 10 month moving average system we see is that the moving average system decreased volatility and returns while increasing the sharpe ratio:

Below are the annual performance statistics which include no down years (2012 is down year to date):

When we apply the 10 month moving average system to the Emerging Markets version(EEM/SHY/TLT/GLD), we see the same impact, a decrease in returns and volatility and an increase in the portfolios sharpe ratio:

The annual statistics include no losing years (2012 is down year to date):

The table below summarizes the returns of each strategy for comparison purposes:

 

Time Period 2006-present
Portfolio Strategy Total Return CAGR Volatility Sharpe Max draw down
“Original” Permanent Portfolio (SPY/SHY/TLT/GLD) Buy & Hold 81.10% 10.20% 9.20% 0.73 -15.85%
“Emerging Mkt” Permanent Portfolio (EEM/SHY/TLT/GLD) Buy & Hold 90.50% 11.10% 12.00% 0.63 -23.12%
“Original” Permanent Portfolio 10 month SMA 69.30% 9.00% 7.10% 0.79 -7.10%
“Emerging Mkt” Permanent Portfolio 10 month SMA 83.30% 10.40% 9.10% 0.75 -11.80%
SPY Buy & Hold 23.90% 3.60% 24.40% 0.12 -55.20%
SPY 10 month SMA 60.30% 8.00% 13.20% 0.38 -18.70%

There are some important caveats in these tests. The time period covered is relatively short by historical standards so it is difficult to draw significant conclusions.  The period tested includes 2008, a particularly volatile period for equities and fixed income securities. Commissions, taxes, and slippage (the price you would actually get filled at when placing a real order versus the historical data used for the tests) will impact results.