ETF Replay Portfolio For August

I track this strategy as a public portfolio on Scott’s Investments. As of the close July 31st the hypothetical portfolio was up 13.60%, 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 July 31st the strategy sold its positions in Vanguard MSCI U.S. REIT (VNQ) for a gain of 2%. The proceeds were used to purchase iShares Barclays Long-Term Treasury (TLT). The portfolio also continues to hold iShares iBoxx Invest Grade Bond (LQD), PowerShares Emerging Mkts Bond (PCY) and U.S. Utilities Sector SPDR (XLU).

The purchase of TLT for this month is noteworthy – long-term interest rates in the United States are near historic lows. More than one market pundit has called for a “bottom” in interest rates since 2008/2009. Holding long-term bonds over the long-term is a scary proposition – rates are bound to increase someday which would cause the value of TLT to drop. However, keep in mind that this strategy is rules-based and rotates between several different asset classes on a monthly basis. Also, when everyone and their grandmother sees a trade as a slam-dunk (in this case shorting bonds), the market will surely take its time in cooperating.

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:


Below is a performance graph of the portfolio (green) versus SPY (SPDR S&P 500 ETF) in purple from the portfolio’s inception until July 31st, 2012. Total returns are similar but a significant drawdown was avoided in 2011: