How often are your portfolios updated?
They are updated at the end of every month. The last day of every month after the close, the new ETF allocations are posted on the website. The Model portfolios assume that the ETFs are bought/sold at that closing price.
How am I supposed to rebalance my portfolio?
Backtesting and experience have shown that placing the trades at the close of the first day of the month does not alter the performance of the strategies. One way to implement the rebalancing is to enter a limit order on the 1st of the new month at the last month’s closing price. If the order is not filled during the day, buy at the close.
Your strategies are backtested over an 8 year period. Isn’t this too short?
Yes and no. There were not many ETFs before 2003 to make a sound backtest of our strategies. This being said, several academic studies have highlighted that momentum strategies applied to indexes and mutual funds have performed strongly over the years. To name only one, Mebane Faber provides strong evidence of such outperformance.
Furthermore, the 2003-2010 period has been representative of most market conditions (bull, sideways and historic bear market).
Finally, our strategies are built to be dynamic and adapt to any market environment.
How is it possible to take advantage of momentum when markets are moving sideways?
First, even when U.S. Equities are moving sideways, it does not mean that no market in the world is trending. Institutional investors, because of their purpose and / or mandate, do need to have their resources invested. The resulting money flows always create trends in some asset classes: real estate and gold after the burst of the tech bubble, U.S. Treasuries during the autumn 2008 crash, etc…
How do the strategies behave when “everything is going down” ?
This is precisely the kind of situation where it is paramount to have an efficient investment strategy. Because in such cases, diversification is useless.
Our strategies provide a dynamic investing process which is able to move to cash swiftly when “everything is tumbling”.
To dig deeper in the mechanics of the strategies, we only invest in ETFs whose performance, according to our indicators, is better than that of cash. Otherwise we move to cash. This is why the number of positions we hold may move according to market developments.
Finally, we have a few “inverse ETFs” (ETFs that replicate the performance of short positions) in our universe. In bear markets, they will perform better and we will hold them. For instance, as of September 30, 2008, our asset allocation recommendation was a mix of cash, long-term U.S. Treasuries and an ETF replicating a short position on the SP500 (SH).
As a matter of fact, both our aggressive and conservative model portfolios returned over 15% in 2008 with limited volatility and drawdown.
Isn’t holding 10 to 25% of your portfolio in one single security dangerous in terms of concentration / lack of diversification?
Actually no, and this is why ETFs are so powerful. Long story short, having 20% of a portfolio invested in the SPY (replicating the SP500 performance) means that 20% of your portfolio is indeed invested in 500 stocks.
Given this, holding only a limited number of positions gives flexibility to adjust to market developments at a ver low cost. This also highlights one of the main benefits of ETFs over Mutual Funds: there are no load fees and you can purchase an sell them anytime during the day, like stocks.
Can I purchase the recommended ETFs anytime during the current month?
We would advise not to.
This being said, our backtests and experience suggest that rebalancing every two weeks do not significantly alter returns, although such implementation may deliver more volatility and slightly bigger drawdowns.
We intend to provide mid-month rankings for those willing to trade more frequently or start taking exposure to asset classes as soon as they subscribe anyway.
What are the best online brokers to implement such strategies?
We have no affiliation with any brokers. But there are some out there now charging $1 per trade, somtimes even less. You may want to consider them. Some others are offering commission-free ETF trading, provided the ETFs are kept for at least 30 business days. They are worth considering as well. This being said, they do not offer such free trades for all the ETFs we have in our universes.
What are the technical and fundamental indicators you use on top of your ranking model?
Our strategies are proprietary. But in order for you to be confident enough to implement them, here are some specifics. Performance and volatility are our main criteria for ranking the ETFs in our universes. But the rankings can be altered in the Top ETFs do not meet certain pre-requisites. The following indicators indeed act as filters:
- Technical: if an ETF has been overbought for an extended period of time AND trades above x% of a reference MA, the odds that it is about to experience a correction are high. An ETF also needs to have recently performed better than the cash ETF (SHY) to be retained.
- Fundamental: for equity ETFs, their current P/E shall not be in an extreme percentile compared to their historic P/E.
How do these strategies fit in a global portfolio strategy?
Our strategies provide a comprehensive investment process, as they dynamically adjust to markets behavior and provide clear allocation decisions and money and risk management.
Depending on your risk appetite, you may want to mix our conservative and aggressive strategies.
You might also want to diversify further, not only through asset classes, sectors, and securities, but also through different systems and strategies. In this case, you may consider different options:
- consider our strategies as a way to replicate a hedge fund exposure in your traditional asset allocation. For instance, big endowments typically have over 20% exposure to hedge funds or funds of funds.
- complement our strategies with other strategies: equity portfolio, dividend stocks portfolio, contrarian strategies… We will regularly post articles on the benefits of “strategy diversification” in the blog section of the site.
What is the ETF Universe you are using?
This Universe of the Conservative Portfolio is detailed in an article posted in June 2011 on the blog.
The overall list on which the Platinum Portfolio is based is avaliable here: http://myetfhedgefund.com/etf-universe-platinum-portfolio
We would also recommend that you read these previous posts: