A Relative Strength ETF Portfolio For September (PFF, PCY, LQD, TLT, SPY, SCZ, SDY)

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September 7, 2010 1:05pm NYSE:LQD NYSE:PCY

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 back-test them for free on ETF Replay. I originally created a portfolio of 22 ETFs which I believe represent a broad range of markets and this month I expanded it to 25 ETFs.  I swapped (NYSE:PFF) – preferred stock for (NYSE:SDY) in order to get an ETF that has less correlation to (NYSE:SPY). I also added (NYSE:SCZ) – EAFE Small Cap.  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 time frames as well). I am also now tracking the performance of a strategy which combines the average of short term time frames, 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 back-tests on these strategies please see my previous posts or last month’s list.

Last month’s top 3 returned 4.9% for the 6/3/3 strategy and 2.71% for the 3/20/20 strategy, both crushing equities–as represented by (NYSE:SPY) which returned  -5.96% for the month–and the average return of all ETFs on the list.
As of the close on August 31st, the top 3 ETFs in the basket of 25 for the 6/3/3 strategy were:

(NYSE:PCY)  PowerShares Emerging Mkts Bond (7.6yr)    
(NYSE:TLT)   iShares Barclays Lng-Tm Treasury (15yr)
(NYSE:PFF)   iShares S&P US Preferred Stock Index

 The top 3 ETFs in the basket of 25 for the 3/20/20 strategy were:

(NYSE:PFF)   iShares S&P US Preferred Stock Index
(NYSE:PCY)  PowerShares Emerging Mkts Bond (7.6yr)
(NYSE:LQD)  iShares iBoxx Invest Grade Bond (7yr)

I should emphasize that users are not limited to re-balancing/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 back-test 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.

No current positions

Written By Scott’s Investments

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