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Momentum Portfolio Update

In 2011, Scott’s Investments began tracking a momentum portfolio which ranks a basket of ETFs based on price momentum and volatility. In 2014, I also introduced a pure momentum system, which ranks the same basket of ETFs based solely on 6-month price momentum. The first portfolio was previously called the “ETFReplay.com Portfolio”, but going forward, it will be called the “Conservative Momentum Portfolio” (or “6/3/3 strategy”) to reflect some changes in the portfolio and tracking methodology for both portfolios detailed below. In previous years, the Conservative Momentum Portfolio began with a static basket of 14 ETFs. The basket of 14 ETFs will be reduced to 10 ETFs. This change is being made in order to further simplify the portfolio. The 10 ETFs are listed below: RWX SPDR Dow Jones International Real Estate ETF PCY PowerShares Emerging Markets Sovereign Debt Portfolio ETF EFA iShares MSCI EAFE ETF EEM iShares MSCI Emerging Markets ETF VNQ Vanguard REIT Index ETF TIP iShares TIPS Bond ETF VTI Vanguard Total Stock Market ETF GLD SPDR Gold Trust ETF TLT iShares 20+ Year Treasury Bond ETF SHY iShares 1-3 Year Treasury Bond ETF The ETFs will still be ranked by 6-month total returns (weighted 40%), 3-month total returns (weighted 30%), and 3-month price volatility (weighted 30%). The top 3 will be purchased at the beginning of each month, and if a holding drops out of the top 3 at the next month’s rebalance, it will be replaced. Previously, the portfolio purchased the top 4 ETFs and only sold when a holding dropped out of the top 5. In addition, ETFs previously had to be ranked above the cash-like ETF ((NYSEARCA: SHY )) in order to be included in the portfolio. This requirement will be removed, so the top 3 ETFs will be held regardless of proximity to SHY. Pure Momentum System The pure momentum system previously ranked ETFs based solely on 6-month price momentum. For 2015, the strategy will rank ETFs based on 5-month price momentum. There is no cash filter in the pure momentum system, volatility ranking, or requirement to limit turnover. Previously, the strategy bought the top 4 ETFs each month – going forward, the top 3 ETFs will be purchased. The portfolio and rankings are posted on the same spreadsheet as the 6/3/3 strategy. The portfolio names are dropping “ETFreplay.com” because the strategy can be tracked on multiple website. ETFReplay.com is still an excellent choice for tracking and backtesting the strategies detailed. However, a formidable free option for backtesting these strategies has emerged at Portfolio Visualizer . The current top 3 ETFs are listed below for each strategy: Conservative Momentum TIP iShares Barclays TIPS Bond Fund SHY iShares Barclays 1-3 Year Treasry Bond Fund TLT iShares Barclays 20 Year Treasury Bond Fund Pure Momentum PCY PowerShares Emerging Markets Bond TLT iShares Barclays 20 Year Treasury Bond Fund VNQ Vanguard MSCI U.S. REIT The current portfolios are below: Conservative Momentum Position Shares Avg. Purchase Price Purchase Date TIP 38 111.2 2/1/2016 TLT 32 126.67 2/1/2016 SHY 49 84.36 12/31/2015 Pure Momentum Position Shares Purchase Price Purchase Date PCY 117 27.65 8/31/2015 TLT 25 126.67 2/1/2016 VNQ 40 79.89 10/30/2015 Current signals can be viewed on Scott’s Investments here . Disclosure: None.

Best And Worst Q1’16: Consumer Staples ETFs, Mutual Funds And Key Holdings

The Consumer Staples sector ranks first out of the ten sectors as detailed in our Q1’16 Sector Ratings for ETFs and Mutual Funds report. Last quarter , the Consumer Staples sector ranked first as well. It gets our Attractive rating, which is based on an aggregation of ratings of 9 ETFs and 15 mutual funds in the Consumer Staples sector. See a recap of our Q4’15 Sector Ratings here . Figure 1 ranks from best to worst all nine Consumer Staples ETFs and Figure 2 shows the five best and worst-rated Consumer Staples mutual funds. Not all Consumer Staples sector ETFs and mutual funds are created the same. The number of holdings varies widely (from 17 to 116). This variation creates drastically different investment implications and, therefore, ratings. Investors seeking exposure to the Consumer Staples sector should buy one of the Attractive-or-better rated ETFs or mutual funds from Figures 1 and 2. It is rare that one of the worst ETFs in this sector hold enough quality stocks to earn an Attractive-or-better rating. Figure 1: ETFs with the Best & Worst Ratings – Top 5 Click to enlarge * Best ETFs exclude ETFs with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings Figure 2: Mutual Funds with the Best & Worst Ratings – Top 5 Click to enlarge * Best mutual funds exclude funds with TNAs less than $100 million for inadequate liquidity. Sources: New Constructs, LLC and company filings The Fidelity Select Automotive Portfolio (MUTF: FSAVX ) is excluded from Figure 2 because its total net assets (TNA) are below $100 million and do not meet our liquidity minimums. The Vanguard Consumer Staples Index Fund ETF (NYSEARCA: VDC ) is the top-rated Consumer Staples ETF and the Vanguard Consumer Staples Index Fund (MUTF: VCSAX ) is the top-rated Consumer Staples mutual fund. VDC earns a Very Attractive rating and VCSAX earns an Attractive rating. The PowerShares DWA Consumer Staples Momentum Portfolio (NYSEARCA: PSL ) is the worst-rated Consumer Staples ETF and the ICON Consumer Staples Fund (MUTF: ICRAX ) is the worst-rated Consumer Staples mutual fund. PSL earns a Neutral rating and ICRAX earns a Very Dangerous rating. 121 stocks of the 3000+ we cover are classified as Consumer Staples stocks. Wal-Mart Stores (NYSE: WMT ) continues to be one of our favorite stocks held by VDC and earns an Attractive rating. Since 1998, Wal-Mart has been uniquely consistent in growing after-tax profit ( NOPAT ) by 9% compounded annually and earning a double-digit return on invested capital ( ROIC ), which is currently 11%. Additionally, Wal-Mart has generated over $57 billion, cumulatively, in free cash flow over the past five years. Overblown concerns about Wal-Mart’s business model pushed the stock down over 25% last year, which has made shares greatly undervalued. At its current price of $64/share, WMT has a price to economic book value ( PEBV ) ratio of 0.8. This ratio means that the market expects Wal-Mart’s NOPAT to permanently decline by 20%. However, if Wal-Mart can grow NOPAT by just 2% compounded annually over the next decade , the stock is worth $98/share today – a 53% upside. The J.M. Smucker Company (NYSE: SJM ) is one of our least favorite stocks held by ICRAX and earns a Dangerous rating. Over the past five years, J.M Smucker’s NOPAT has declined by 2% compounded annually while its ROIC has fallen from 8% to 5%. Despite the deterioration of the business, SJM is up over 20% in the past two years, which has left shares significantly overvalued. To justify its current price of $122/share, SJM must grow NOPAT by 13% compounded annually for the next 12 years . This expectation seems awfully optimistic given SJM’s inability to grow NOPAT at all in the past five years. Figures 3 and 4 show the rating landscape of all Consumer Staples ETFs and mutual funds. Figure 3: Separating the Best ETFs From the Worst ETFs Click to enlarge Sources: New Constructs, LLC and company filings Figure 4: Separating the Best Mutual Funds From the Worst Mutual Funds Click to enlarge Sources: New Constructs, LLC and company filings D isclosure: David Trainer and Kyle Guske II receive no compensation to write about any specific stock, sector or theme.

Reducing Volatility While Staying In The Stock Market With USMV

During February, we think investors should consider iShares MSCI USA Minimum Volatility ETF (NYSEARCA: USMV ). In ranking approximately 860 equity ETFs, we combine holdings-level analysis with ETF-level attributes, such as bid/ask spread, expense ratio and volatility. According to Sam Stovall, US equity strategist for S&P Capital IQ, since 1946, there have been 56 pullbacks, or price declines of 5.0%-9.99%. They fell an average of 7% over a little more than one month and took fewer than two months to get back to breakeven. There have been 20 corrections (-10.0% to -19.9%) since WWII, erasing an average 14% from the value of the S&P 500. They typically took a bit more than four months to go from peak to trough and a similar number of months to recover fully. We think USMV is strong ETF for consideration for investors wanting to reduce the risk considerations of their overall U.S. equity exposure. We expect the market to remain volatile in February due in part to sluggish earnings and modest economic prospects, but we look to the S&P 500 index to end 2016 much higher than where it is currently trading. As such believe this ETF allows investors to stay fully invested while reducing the risk profile of their overall portfolio. Now is a good time, according to S&P Capital IQ, to look at low-volatility strategies. Yet it is important to understand how USMV is constructed. The ETF is diversified across all 10 sectors, but holds the least volatile securities within the sector. iShares, working with an MSCI benchmark, uses sector bands (+/- 500 basis points relative to a parent MSCI index at the semi-annual rebalance). As such, at year end, financials (22% of assets), health care (20%), information technology (15%) and consumer staples (15%) are the largest sectors. Relative to the parent MSCI index, tech is underweighted, while the other three are overweighted. Other sectors underweighted are industrials (4.5%) and energy (1.9%). From a sector perspective, USMV is different than its peer from PowerShares. That ETF has no sector bands and as such has more in financials (27% of assets) and less in tech (2%). USMV ranks favorably to S&P Capital IQ for all four risk consideration inputs to our ranking. Three of these, S&P Capital IQ Quality Rankings and Qualitative Risk Assessments, along with Standard & Poor’s Credit Ratings, are tied to the holdings. The relatively low risk of these holdings are well suited, we think, in the current choppy market. For example, Johnson & Johnson (NYSE: JNJ ) has an A+ Quality Ranking, a low risk assessment and AAA credit rating. S&P Capital IQ equity analyst Jeff Loo, who has a buy recommendation on the shares, view its capital deployment strategy of acquisitions and stock buybacks positively. In October 2015, JNJ announced a $10 billion stock buyback, and the shares currently have a 3% dividend yield. S&P Capital IQ sees earnings per share growing to $6.50 in 2016 and $6.82 in 2017, driven by pharma growth and restructuring efforts. Meanwhile, McDonald’s (NYSE: MCD ) has an A Quality Ranking, a medium risk assessment and BBB+ credit rating. S&P Capital IQ equity analyst Tuna Amobi, who has a buy recommendation on the shares, noted MCD reaffirmed its capital allocation initiatives after relatively encouraging Q4 results — including a 5% increase in global comparable sales — amid early positive signs on its multi-year turnaround strategy. After last year’s sweeping organizational changes Amobi sees further gradual progress on the turnaround initiatives, including an accelerated pace of global refranchising. S&P Capital IQ sees earnings per share in 2016 rising to $5.39 due to operating margin expansion and share repurchases. In addition, USMV earns a favorable ranking input for its below-average three-year standard deviation of 9.1 (ETFs tracking the S&P 500 index have 10.5). Daniel Gamba, managing director and head of BlackRock’s iShares Americas Institutional Business, told S&P Capital IQ in late January that the increased volatility in equity markets has made institutional investors more tactical in using minimum volatility products to lower risk. We think the increased usage of USMV by institutional investors has been a positive for all investors. The average daily trading volume in the past month spiked to 3.3 million, up from 2.0 million during the past six months. The bid/ask spread is $0.01, lower than most ETFs. In addition from a cost perspective, USMV has a modest 0.15% expense ratio. Year to date through January 27, USMV declined only 3.8%, falling less than half as much as the S&P 500 index. In 2015, during a relatively flat year with the broader index up 1.4%, USMV rose 5.5%. We like USMV based on its underlying holdings and from a cost/liquidity perspective. However, should the market volatility diminish quickly and equities to climb higher, this and other lower-risk strategies are prone to underperform in our opinion. Additional disclosure: http://t.co/AHwSBhyHHt