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ETFReplay.com Portfolio September Update

The ETFReplay.com Portfolio holdings have been updated for September 2015. I previously detailed here and here how an investor can use ETFReplay.com to screen for best-performing ETFs based on momentum and volatility. The portfolio begins with a static basket of 14 ETFs. These 14 ETFs are ranked by 6-month total returns (weighted 40%), 3-month total returns (weighted 30%), and 3-month price volatility (weighted 30%). The top 4 are purchased 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. The 14 ETFs are listed below: Symbol Name RWX SPDR Dow Jones International Real Estate ETF PCY PowerShares Emerging Markets Soverign Bond Portfolio ETF WIP SPDR DB International Government Inflation-Protected Bond ETF EFA iShares MSCI EAFE ETF HYG iShares iBoxx $ High-Yield Corporate Bond ETF EEM iShares MSCI Emerging Markets ETF LQD iShares iBoxx $ Investment Grade Corporate Bond ETF VNQ Vanguard REIT Index ETF TIP iShares TIPS Bond ETF VTI Vanguard Total Stock Market ETF DBC PowerShares DB Commodity Index Tracking ETF GLD SPDR Gold Trust ETF TLT iShares 20+ Year Treasury Bond ETF SHY iShares 1-3 Year Treasury Bond ETF In addition, ETFs must be ranked above the cash-like ETF (NYSEARCA: 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), but it could also reduce total returns by allocating to cash in lieu of an asset class. The cash filter is in effect this month, the same as the previous two months. SHY is the highest-rated ETF in the 6/3/3 system. Therefore, it will continue to be the sole holding in the portfolio. The top 5 ranked ETFs based on the 6/3/3 system as of 8/31/15 are below: 6-mo/3-mo/3-mo SHY Barclays Low Duration Treasury (2-year) VTI Vanguard Total U.S. Stock Market HYG iShares iBoxx High-Yield Corp Bond PCY PowerShares Emerging Mkts Bond (7-9 year) TIP iShares Barclays TIPS In 2014, I introduced a pure momentum system, which ranks the same basket of 14 ETFs based solely on 6-month price momentum. There is no cash filter in the pure momentum system, volatility ranking, or requirement to limit turnover – the top 4 ETFs based on price momentum are purchased each month. The portfolio and rankings are posted on the same spreadsheet as the 6/3/3 strategy. The top four 6-month momentum ETFs are below: 6-month Momentum SHY Barclays Low Duration Treasury (2-year) PCY PowerShares Emerging Mkts Bond (7-9 year) TIP iShares Barclays TIPS TLT iShares Barclays Long-Term Trsry VTI, a holding for just one month, will be sold for a loss of 6.09%. HYG, a holding since June 30th, will be sold for a loss of 2.88%. EFA, a holding since April 30th, will be sold for a loss of 9.83%. They will be replaced by TIP, PCY, and TLT. The updated holdings for each portfolio are below. 6/3/3 strategy: Position Avg. Purchase Price Purchase Date Percentage Gain/Loss Excluding Dividends SHY 84.86 5/29/2015 & 6/30/15 -0.09% Pure Momentum strategy: Position Purchase Price Purchase Date Percentage Gain/Loss Excluding Dividends PCY 27.65 8/31/2015 0.00% SHY 84.86 7/31/2015 -0.09% TIP 111.58 8/31/2015 0.00% TLT 121.42 8/31/2015 0.00% Disclosure: None.

High Yield ETF Posts A New 52-Week Low For The First Time In 2015

Driven largely by renewed weakness in the energy sector and that sector’s big weighting in high yield corporates, high-yield spreads are once again widening out over the last few weeks. From a level of 465 basis points above treasuries a month ago, high yield spreads, as measured by the Merrill Lynch High Yield Master Index, have shot up to 549 bps, which is the highest level of the year. In just the last week alone, spreads have widened out by 54 bps, which is the largest 5-day move since late December. As spreads on high-yield debt have widened, prices have dropped and that has made it a rough go for holders of the high yield corporate bond ETF (NYSEARCA: HYG ). Year to date, the ETF is down over 3% not including dividends. That may not sound like much for an equity investment, but for fixed income investors, any loss of capital is an unwelcome trend. Following Monday’s decline of 0.45%, HYG closed at a new 52-week low for the first time in 2015. The chart below shows the price action in HYG going back to early 2008, and the red dots represent each time the ETF closed at a 52-week low. Yesterday’s new low was the 39th time that the ETF has traded at a new one-year low. Prior to Monday, the last time HYG traded at a 52-week low was in December when there were seven occurrences. While a bounce for HYG is certainly possible given the degree to which the ETF is now oversold, the longer term pattern doesn’t look particularly promising as it has been characterized by lower highs and lower lows ever since its bull market high in early 2013. Share this article with a colleague

Hedge Rising Yields With These Junk Bonds ETFs

The path of junk bond ETFs has been patchy for the last couple of months. The space put up a dull show in 2014. The acute plunge in oil prices in the second half of the last year weighed heavily on the space, especially on the energy bonds. This was because the U.S. energy companies spread their presence widely to the high-yield bond market to materialize the shale-oil boom. Thus, fears of their default amid the oil price massacre prompted junk bond sell-offs. Since things have not meaningfully improved on the oil price front especially with the signing of the Iran nuclear deal and sluggish global demand backdrop, junk bonds started taking cues from the Fed interest rate policy. The Fed emphasized the strong U.S. growth momentum in the second half of 2015 that alternatively means the start of policy tightening sometime later this year. The exit from the rock-bottom interest rate policy would raise yields on the treasury notes, thereby hurting the bonds’ prices. In such a scenario, junk bond ETFs could emerge as intriguing options as these are high-yield in nature. Demand for strong and steady current income will likely prevail in the coming months. Investors’ drive for higher yield has become so obvious in the zero-or-negative-yield scenario in the Euro zone and Japan that the global high-yield space has gained immense traction lately, even at the cost of higher risks. Meanwhile, Grexit worries that brewed for over a month frittered away lately with the approval of a new bailout program. Chinese stocks have also stabilized after a wild rout. All these whet investors’ risk-on sentiments to some extent. As a result, the ultra-popular iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA: HYG ) and SPDR Barclays Capital High Yield Bond ETF (NYSEARCA: JNK ) enjoyed ‘their largest daily inflows’ in the week ended July 17, 2015. On July 15, JNK and HYG witnessed 4% and 2.23% rise in AUM topping the fixed income list, per etf.com . In such a backdrop, junk bond ETFs with outsized yield mentioned below may weather the rising rate risks to a large extent. These funds could provide investors with a strong income potential and relatively stable returns while maintaining low correlated assets, and thus could be in focus for high-yield seekers: Interest Rate Hedged High Yield Bond ETF (NYSEARCA: HYGH ) Along with high yield, this fund hedges rise in rates and thus serves as an option to play rising yield in the U.S. The fund holds in its basket iShares iBoxx $ High Yield Corporate Bond ETF while taking short positions in U.S. Treasury futures to diminish rising rate concerns. HYGH has a weighted average maturity of 4.60 years while its effective duration stays ultra-low at negative 0.32 years. HYGH is high yield in nature as evident from its 30-day SEC yield of 5.68%. HYGH charges 0.55% of expense ratio. The fund added about 1.8% in the last five trading sessions (as of July 16, 2015) and is up 0.8% year to date. ProShares High Yield Interest Rate Hedged ETF (BATS: HYHG ) This fund also behaves in the same fashion as that of HYGH while tackling rising rate worries. Its strategy is to take a short position in U.S. Treasury futures. Like HYGH, it also has a pretty high yield (and a modest expense ratio of just 50 basis points) of 5.6% in 30-Day SEC terms, indicating that this could be a safer bond and yield play for investors anxious about the possibility of rising rates. This $105.8 million ETF was up 1.8% in the last five trading sessions (as of July 16, 2015). High Yield Long/Short ETF (NASDAQ: HYLS ) The fund seeks to provide current income by investing primarily in a diversified portfolio of below investment-grade or unrated high-yield debt securities. Though capital appreciation is its secondary motive, it has added a bit this year, gaining 4.5% YTD. The product thrives on long-short strategies. Net weighted average effective duration (considering the short positions) is 2.91 years indicating low interest rate risks. The fund is meant for an intermediate term as evident from 6.18 years of weighted average maturity. The product is expensive with an expense ratio of 1.29% per annum. Volume is light, trading in less than 35,000 shares per day that ensures extra cost for the product in the form of a wide bid/ask spread. The fund yields 6.40% (as of July 16, 2015). iShares Global High Yield Corporate Bond Fund (BATS: GHYG ) This fund tracks the Markit iBoxx Global Developed Markets High Yield Index. The index captures the performance of the global high yield corporate bond market. The fund’s effective duration stands at 4.09 years suggesting moderate interest rate risk. It charges an expense ratio of 40 bps and yields around 4.90%. The fund has added about 1.1% so far this year and was up over 1.9% in the last five trading sessions. Original Post