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Applying A Dual Momentum Model To The IVY 10 Portfolio

Long only, ETF investing, portfolio strategy, momentum “}); $$(‘#article_top_info .info_content div’)[0].insert({bottom: $(‘mover’)}); } $(‘article_top_info’).addClassName(test_version); } SeekingAlpha.Initializer.onDOMLoad(function(){ setEvents();}); How to enhancing a Buy and Hold strategy with Dual Momentum Model. Reduce volatility and portfolio draw-down with an ETF cutoff model. How to apply both absolute and relative momentum to portfolio management. How to triple portfolio returns over a stock-bond index fund. Beginning with the ten (10) ETFs identified in Mebane T. Faber and Eric W. Richardson’s book, The Ivy Portfolio , the following analysis shows how the IVY portfolio would have performed from June 30, 2006 through 6/11/2015 when a momentum model is applied to these ETFs. The ETFs using in this analysis are the IVY 10 plus SHY , our cutoff or “circuit breaker” ETF. Here is the portfolio strategy used with the IVY 10. Rank the ETFs as shown in the following table. Review period is every 33 days. This moves the review or update throughout the month, thus avoiding short-term trading fees, wash rule, and end of month mutual fund window dressing. Look-back periods are 87 days with a 30% weight, 145 days with a 50% weight, and 20% assigned to a 14-day mean-variance volatility setting. ETFs performing below SHY using this ranking system are sold out of the portfolio. Select the top two performing ETFs and invest equal percentages in each. If there is a tie, invest in equal amounts in the three or four top performing ETFs. The absolute momentum model identifies ETFs that are ranked above SHY. The ranking model identifies the relative momentum between the various ETFs. IVY 10 ETF Rankings: The following table (generated from spreadsheet) shows both the absolute and relative momentum for the 10 IVY ETFs. The following table includes 6/11/2015 data. GSG and VB are the top two performing ETFs based on the three metrics used to come up with these rankings. If one were to follow this model today, we would invest equal dollars in GSG and VB. (click to enlarge) IVY 10 Back-Test Results: How has this investing model worked since June 2006? The following graph shows a Monte Carlo calculation where the dark black line is the average performance of the IVY 10. The red line is the performance of our stock-bond benchmark, VTTVX . Note the light gray lines as they show other probabilities or noise around the review days. In reality, investors are likely to make trades from 2 days before the review period to as many as 5 days after the review period. Call this trading noise. Even the worst light gray line outperforms the VTTVX benchmark. Here are a few salient points when Dual Momentum is applied to the IVY or Faber 10. Portfolio return = 240% vs. 77% for the VTTVX index fund. Maximum draw-down (DD) for portfolio is 27% vs. 45% for VTTVX. Average annual DD for portfolio is 14% or under 15%, what might be considered an acceptable level. Average Compound Annual Growth Rate (CAGR) = 14.7%. Trades per review period = 1.7. Tax considerations may dictate one use this model only with tax-deferred accounts. (click to enlarge) Disclaimer: After running hundreds of back-tests using similar models to what is described above, there is still a considerable amount of luck when it comes to the day in which a particular ETF is purchased. The “trading noise” analysis helps to temper this problem, but it is still there. Also, the above model does not account for remaining cash that is left lying around due to dividends and money not invested due to share rounding. Taxes are also an issue as mentioned above. Investors in the 28% tax bracket need to add something close to 2% annually to overcome the difference between short and long-term capital gain taxes. Each investor should take their own tax situation into consideration. Disclosure: The author is long VTI,VEA. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Back-testing analysis was run by interested investor. Share this article with a colleague

3 Utility ETFs Suffering From Rate Hike Worries

Banking on strong recovery in the U.S. economy, analysts are expecting a possible rate hike in September or October this year. Meanwhile, rate hike worries have been weighing on the major benchmarks. Recently released economic data including construction spending, auto sales and job number all came in on the strong side. These have elevated the rate hike possibility further. Strong Economic Recovery After having a dull first quarter, the economy rebounded strongly in the second as indicated by several economic data. The Fed also remained optimistic about a recovery in the second quarter based on strong labor and housing data. According to the U.S. Labor Department, the U.S. economy created a total of 280,000 jobs in May, witnessing the largest job addition since December 2014. Though the unemployment rate marginally rose to 5.5% in May, the rate is expected to decline gradually to Fed’s target this year. The average hourly wages also witnessed a strong year-on-year gain of 2.3%. Among other major economic data, the U.S. Department of Commerce reported that construction spending surged 2.2% in April, its fastest pace since May 2012. Also, most of the major housing data showed that the housing market recovered strongly in April. Meanwhile, U.S. light-vehicle sales gained 1.6% year over year to 1.63 million units last month, witnessing its best May ever in terms of light vehicle sales. Rate Hike Worries Strong economic data indicates that the economy is back on track in the second quarter, leaving behind the first-quarter contraction. This raises the possibility of a rise in interest rates, which have been near zero since the 2008 financial crisis. Before deciding on a rate hike, the Fed will closely watch the labor market situation and the inflation rate. However, the Fed remained “reasonably confident that inflation will move back to its 2% objective over the medium term”. The evolving macro environment points toward a possible rate hike in the not-too-distant future. Stock market investors are finding this prospect somewhat discouraging, which has been showing up in the market’s daily activity in recent sessions. Higher interest rates can make stocks less appealing and especially so in the dividend space. In this scenario, sectors including utilities that are expected to be affected by a rate hike have suffered heavily in recent times. 3 Utility ETFs Suffering The Utility sector is one of the most rate-sensitive sectors due to its high level of debt. Utilities are capital-intensive businesses and the funds generated from internal sources are not always sufficient for meeting their requirements. As a result, the companies have to approach the capital markets for raising funds. As a result, a rising rate environment may have a negative impact on this sector. Here, we highlight 3 utility ETFs that have suffered in recent times on rate hike worries. PowerShares DWA Utilities Momentum Portfolio (NYSEARCA: PUI ) This fund provides exposure across 40 securities by tracking the DWA Utilities Technical Leaders Index. Nearly 40% of total assets are allocated to the top 10 holdings. Sector-wise, multi-utilities take the top spot at 37.7%, while electric utilities and gas utilities take the next two positions. PUI has amassed $31.9 million in its asset base while it sees light volume of around 9,000 shares a day. The ETF has 0.60% in expense ratio and has declined 3.7% over the past one month. Guggenheim S&P 500 Equal Weight Utilities ETF (NYSEARCA: RYU ) This fund follows the S&P 500 Equal Weight Index Telecommunication Services & Utilities, holding 36 stocks in its portfolio. It is well diversified across its holdings with none of the companies accounting for more than 3.2% of the total assets. The ETF has been able to manage $128.3 million in its asset base and is moderately traded with more than 58,000 shares per day. It charges 40 bps in annual fees and expenses. The product has declined 3.2% in the trailing one-month period. iShares U.S. Utilities ETF (NYSEARCA: IDU ) This ETF provides exposure to 61 firms by tracking the Dow Jones U.S. Utilities Index. The fund has amassed $583.3 million in its asset base while it sees a moderate volume of around 417,000 shares a day. The product is largely concentrated in the top 10 firms that collectively make up for half of the basket. About 52% of its assets are allocated to electric utilities. The ETF charges a fee of 43 bps annually and has lost more than 2.9% in the past one month. Original Post

Greek Debt Concerns Put GREK In Focus

Investors have been worried over the debt negotiations between Greece and its creditors this year. This also had a negative impact on the major benchmarks. Recently, Greek Prime Minister Alexis Tsipras submitted fresh proposals before its creditors to settle the debt crisis. Meanwhile, Greece failed to repay a debt of around $338.7 million to the International Monetary Fund (IMF) and decided to bundle four June payments into one, to be paid on June 30. Separately, Tsipras is looking for support from his Syriza party on this matter. However, the situation is not in his favor at this moment. Several members wanted a re-election if Tsipras lets the creditors have their say. “Realistic” Proposals New proposals are reported to consist of concessions on stricter austerity targets. Reportedly, it includes a hike in the VAT (value added tax) rate, among other financing options that will buy Greece time to strike a deal next March. It was also reported that the finance minister Yanis Varoufakis came up with an idea to transfer the debt held by the European Central Bank (ECB) to the European Stability Mechanism, Eurozone’s crisis-fighting fund. After submitting these proposals, Tsipras said he believes that Greece will be able to strike an agreement regarding debt negotiations in the near future. Though it was reported that the creditors may consider extending the country’s bailout program till the end of March 2016, creditors sounded not so optimistic about the proposals. It was reported that the creditors, including IMF, may consider the extension if Athens implements measures including pension cuts, tax increases, and other policies. Will ‘Grexit’ Happen? It is speculated that nobody wants the nation to exit the common currency bloc and thus Greece is poised to play “the game for as long as they can.” Grexit may lead to instability in the currency union, which other members of the EU would like to avoid. In this scenario, the “Grexit” prospect seems unlikely. Meanwhile, German Chancellor Angela Merkel and French President François Hollande agreed to meet Greek Prime Minister Alexis Tsipras on the sidelines of a Brussels summit to defuse the standoff between Greece and its creditors over the country’s bailout program. Moreover, the European Central Bank increased the amount Greek banks can borrow from their central bank to $94.1 billion, the highest increase since Feb 18. Separately, the New York Times’ Paul Krugman pointed out that Greece has already done a large volume of adjustments, the cost of which is so huge that the country should have been in a better position if it had exited the euro in 2010. He noted: “You can make an even better case that Greece would have been much better off if it had never joined in the first place. But at this point these are sunk costs. If Greece can negotiate a halfway reasonable compromise, one that more or less pauses further austerity, it’s hard to see that the risks of exit would be worth it.” GREK in Focus Several investors are hoping that the country will reach a deal with its creditors soon. Wilbur Ross, who along with a group of investors, has $1.47 billion riding on Eurobank Ergasias, the third largest bank in Greece, remained optimistic about the situation. Regarding the investment environment in Greece, Ross said that the dismal situation might take a swift turn in the near future “if the brinkmanship on display between Athens and the creditors ends in a credible deal that restores the confidence of foreign investors.” In this scenario, the Greek ETF – Global X FTSE Greece 20 ETF (NYSEARCA: GREK ) – will remain on investors’ radar till a potential deal is struck between Greece and its creditors. The ETF tracks the FTSE/ATHEX Custom Capped Index that is designed to reflect the performance of the 20 largest securities listed on the Athens Stock Exchange. The product holds 22 stocks in the basket and is heavily concentrated in the top 5 holdings that make up for a combined 55.4% of assets. The ETF has around $308.8 million in its asset base and sees a moderate trading volume of more than 800,000. The fund charges 55 bps in annual fees from investors and has a dividend yield of 1.1%. GREK has a Zacks Rank #3 (Hold) with a High risk outlook. The fund lost? 10.3% in the year-to-date frame and declined nearly 1% in the trailing one month. Original Post