An ETF Strategy For December (PFF, SDY, SPY, SCZ, XLE, RWX, VBR)
I previously detailed here and here how an investor can use ETF Replay to screen for best performing ETFs based on momentum and volatility. Users can set up their own portfolios, track, and backtest them for free on ETF Replay. I originally created a portfolio of 22 ETFs which I believe represent a broad range of markets and I expanded it to 25 ETFs in September. I swapped the iShares S&P U.S. Preferred Stock Index ETF (NYSE:PFF) for the SPDR S&P Dividend ETF (NYSE:SDY) in order to get an ETF that has less correlation to the SPDR S&P 500 ETF (NYSE:SPY). I also added the iShares MSCI EAFE Small Cap Index ETF (NYSE:SCZ). I update and track the portfolio monthly on my site. The strategy is simple: purchase the top ETFs based on a combination of their 6 month returns, 3 month returns, and 3 month volatility (lower volatility receives a higher ranking; users have the flexibility to change these timeframes as well). I also track the performance of a strategy which combines the average of shorterm timeframes, the 3 month return, 20 day return, and 20 day volatility. I refer to these two different sets as “6/3/3″ and “3/20/20″. For some backtests on these strategies please see my previous posts or August’s list.
Last month’s list was disappointing, the top 3 returned -2.31% for the 6/3/3 strategy and -1.12% for the 3/20/20 strategy.
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As of the close on November 30th, the top 3 ETFs in the basket of 25 for the 6/3/3 strategy were:
U.S. Energy Sector SPDR ETF (NYSE:XLE)
iShares MSCI EAFE Small Cap Index ETF (NYSE:SCZ)
SPDR Dow Jones Intl Real Estate ETF (NYSE:RWX)
The top 3 ETFs in the basket of 25 for the 3/20/20 strategy were:
Vanguard MSCI U.S. SmallCap Value ETF (NYSE:VBR)
SPDR S&P 500 ETF (NYSE:SPY)
U.S. Energy Sector SPDR ETF (NYSE:XLE)
I should emphasize that users are not limited to rebalancing/reviewing this list on the 1st of the month. It can be checked/updated at any point in time. However, the more frequently it is reviewed and rebalanced, the higher the potential transaction costs. In the backtest to the beginning of 2005, there were 57 total changes, which equates to roughly 10 per year on average which is not overly aggressive in my opinion, especially given the plethora of low-cost brokers available. Of course, if you can find a broker to give you free ETF trades like many are now offering, the potential costs can be reduced even further.
Written By Scott’s Investments (No Positions)
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