Market Overview Portfolio – February Update


Among the more popular portfolios on Scott's Investments has been 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 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:

RWX SPDR DJ International Real Estate
WIP SPDR Int'l Govt Infl-Protect Bond (9-10yr)
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%

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: Markets Trading Ideas ETFs


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