At the end of May I reviewed a very simple ETF rotation system using the free tools available at ETF Replay involving (NYSE:GLD), (NYSE:SPY), and (NYSE:SHY) – low duration Bond ETF, used as a proxy for cash.   Using the average of the 3 month return (weighted 40%), 20 day return (weighted 30%), and 20 day volatility (30%), (NYSE:SHY) is currently ranked highest among the three.  If we lengthen the time frame to average the 6 month return (weighted 40%), 3 month return (weighted 30%), and 3 month volatility (weighted 30%), (NYSE;GLD) is surprisingly still ranked highest.

Given that (NYSE:SPY) has been caught in a range of late, I thought it would be helpful to test a similar system using (NYSE:DBC) -PowerShares Commodity ETF, (NYSE:SPY), (NYSE:EFA) -MSCI EAFE, (NYSE:SHY), and (NYSE:TLT) -long-term treasuries.  The shorter term system (3-20-20) ranks the fives ETFs as (NYSE:SHY), (NYSE:TLT), (NYSE:EFA), (NYSE:SPY), (NYSE:DBC). The longer term system (6-3-3) ranks long term treasuries (NYSE:TLT) as the top ranked, (NYSE:SHY) second, and PowerShares Commodity ETF the lowest.

What can this information tell us?  With equities hovering near the 200 day moving average–an indicator I look at frequently–a simple exercise like this can give us perspective as to where there strength lies among various asset classes (using ETFs as a proxy).

For those interested in following a larger pool of assets classes, I now track a portfolio of 21 (soon to be 24) ETFs using the same strategy discussed above updated around the 1st of the month. Please look for the “ETF Replay Top ETF” portfolio on the right hand-side of my site. As of today, (NYSE:PCY) -emerging markets bonds would be ranked first on my list of 24 ETFs.

Written By Scott From Scott’s Investments

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NYSE:DBC, NYSE:EFA, NYSE:GLD, PCY, SHY, SPY, TLT