ETFReplay.com Portfolio for December

This month’s ETFReplay.com Relative Strength ETF Portfolio has been updated at Scott’s Investments and includes turnover in two out of four positions.

I previously detailed here and here how an investor can use ETFReplay.com to screen for best performing ETFs based on momentum and volatility. I select only the top ETFs out of a static basket of 25 ETFs and re-balance the portfolio monthly.

The portfolio strategy is to 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) and 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″. The top 2 ETFs in the 6/3/3 ranking and top 2 in the 3/20/20 ranking are purchased each month. When there are duplicates in the top 2, I look to the third ranked ETF in the 3/20/20 and, if necessary, the third ranked ETF in the 6/3/3. The strategy always holds 4 ETFs.

I track this strategy as a public portfolio on Scott’s Investments. As of the close November 30th the hypothetical portfolio was up 13.9%, since inception on January 1st, 2011. Returns include dividends but exclude commissions and taxes and all trades are hypothetical so real results will differ. For some backtests on these strategies please see a recent post here.

For November 30th the portfolio sold its positions in iShares S&P US Preferred Stock Index (PFF) and iShares iBoxx Invest Grade Bond (LQD).

The proceeds were used to purchase SPDR Int’l Govt Infl-Protect Bond (WIP) and PowerShares DB G10 Currency Harvest (DBV).

Top 50 Trending Stocks

Minor fluctuations in rankings may not always justify selling positions each month. For example, if one ETF drops from the second highest rated to the third or fourth highest rated, it may not warrant selling the position. An investor could only sell a position when it drops out of the top 4 or 5 at the end of the month. This type of modification could be used when someone is looking to limit turnover; however, I think it is important to have whatever rule you prefer to use in place prior to making the investment decision in order to avoid discretionary or emotional decision making.

Below are the top 6 ranked ETFs for this month, using both the 6/3/3 and 3/20/20 strategy:
6mo/3mo/3mo

PCY PowerShares Emerging Mkts Bond
RWX SPDR DJ International Real Estate
SCZ iShares MSCI EAFE Small Cap Index
WIP SPDR Int’l Govt Infl-Protect Bond
EFA iShares MSCI EAFE
DBV PowerSh DB G10 Currency Harvest

3mo/20day/20day

PCY PowerShares Emerging Mkts Bond
WIP SPDR Int’l Govt Infl-Protect Bond
DBV PowerSh DB G10 Currency Harvest
DBB PowerShares DB Base Metals
RWX SPDR DJ International Real Estate
EFA iShares MSCI EAFE

Below is a performance graph of the portfolio (green) versus SPY (SPDR S&P 500 ETF) and AOR (S&P Growth Allocation) from the portfolio’s inception until November 30th, 2012.


Disclaimer: Stock Loon LLC, Scott's Investments and its author is not a financial adviser. Stock Loon LLC, Scott's Investments and its author does not offer recommendations or personal investment advice to any specific person for any particular purpose. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of www.scottsinvestments.com