I previously detailed here and here how an investor can use ETF Replay to screen for best performing ETFs based on momentum and volatility. I originally created a portfolio of 22 ETFs and then expanded it to 25 ETFs which I believe represent a diverse basket of ETFs.
The buy/sell strategy for the portfolio 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). I also track the performance of a strategy which combines the average of 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.
The strategy is to buy the top 2 ranked ETFs in the 6/3/3 and 3/20/20 screen. If there are duplicates in the top 2, then the strategy purchases the third ranked ETF in the 3/20/20 strategy and, if necessary, the third ranked in the 6/3/3 strategy. In other words, the portfolio always holds 4 ETFs.
I began a hypothetical ETF portfolio which combine the above 2 strategies and track it publicly on Scott’s Investments. The starting balance of the portfolio was $10,000 and year to date it is up 8.22% including dividends.
As of the close on March 31st, the top 2 ETFs in the basket of 25 for the 6/3/3 strategy were:
PowerShares DB Commodity Index (NYSE:DBC)
Elements S&P C.T.I. (NYSE:LSC)
The top 2 ETFs in the basket of 25 for the 3/20/20 strategy were:
U.S. Energy Sector SPDR (NYSE:XLE)
SPDR Int’l Govt Infl-Protect Bond (9-10yr) (NYSE:WIP)
For April the strategy is selling Vanguard Morgan Stanley REIT (NYSE:VNQ) and DB Agricultural Commodities Index (NYSE:DBA) and using the proceeds to purchase WIP and LSC. The inflation trade is still on in the portfolio, with the positions benefiting from investor concerns over rising energy costs and inflation.
Chris Vermeulen (The Gold and Oil Guy) wrote on Thursday that equities and commodities may be starting another rally. His argument is that the US dollar may be starting another decline, which should be bullish for stocks and commodities: “I feel as though the dollar will trigger the next wave of buying in stocks and commodities for the next week or two… We should see the dollar make a clean moving in either direction shortly and that will help guide my analysis, positions and setups.”
His analysis supports ETF Replay’s positions in the commodity centric ETFs. Investors who are also long equities or who make discretionary trades will want to watch the US dollar to position themselves in April.
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 a backtest performed in 2010 (referenced above), starting at the beginning of 2005 there were 57 total changes, which equates to roughly 10 per year on average. This is not overly aggressive in my opinion, especially given the plethora of low-cost brokers available.
Written By Scott’s Investments No position disclosures
Scott’s Investments focuses on several different ETF portfolio strategies ranging from Basic, Individual, Country, US Sector, and Global Sector ETF portfolios.