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Capital Growth Letter
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Capital Growth Letter Sector Selector ETF Portfolio Program and
lists of ETF candidates for each of the three ETF Portfolios.
The three Sector Select ETF Portfolios are managed in a relatively straight forward manner:
All are selected from base lists of Exchange Traded Funds, employ relative-strength ranking,
are updated weekly and utilize the cast-out method. Using a proprietary formula, we rank the
strength of each list of ETFs relative to one another and focus on the top-rated funds. To
maintain the portfolios we use a cast-out approach, which means that we hold each ETF as long
as it is ranked in the upper half of the list. Whenever an ETF falls below the middle of the
ranking, we sell it and immediately replace it with the highest-ranked ETF from its group not
already held in the portfolio.
A very important part of any relative-strength program is the selection of the list of securities
to be rotated. We use a correlation matrix to eliminate ETFs that highly correlate to each other
so the final collection of ETFs provides appropriate diversification and we screen for liquidity.
When developing the program we tested if it would be profitable to short in a declining market but
our research showed that for this type of program there was no benefit in doing so.
There are three Sector Select ETF Portfolios: Style, Sector and International.
Our current International Portfolio has a universe of 24 funds.
Our current Sector Portfolio has a universe of 27 funds.
Our current Style Portfolio has a universe of 21 funds.
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International Portfolio
| 1. |
EIS |
Israel |
| 2. |
EWA |
Australia |
| 3. |
EWC |
Canada |
| 4. |
EWD |
Sweden |
| 5. |
EWG |
Germany |
| 6. |
EWH |
Hong Kong |
| 7. |
EWI |
Italy |
| 8. |
EWJ |
Japan |
| 9. |
EWK |
Belgium |
| 10. |
EWL |
Switzerland |
| 11. |
EWM |
Malaysia |
| 12. |
EWN |
Netherlands |
| 13. |
EWO |
Austria |
| 14. |
EWP |
Spain |
| 15. |
EWQ |
France |
| 16. |
EWS |
Singapore |
| 17. |
EWT |
Taiwan |
| 18. |
EWU |
United Kingdom |
| 19. |
EWW |
Mexico |
| 20. |
EWY |
South Korea |
| 21. |
EWZ |
Brazil |
| 22. |
EZA |
South Africa |
| 23. |
FXI |
China |
| 24. |
RSX |
Russia |
| Sector Portfolio
| 1. |
IAU |
Gold |
| 2. |
IBB |
Biotech |
| 3. |
IGN |
Networking |
| 4. |
IGV |
Software |
| 5. |
IGW |
Semiconductor |
| 6. |
IXG |
Global Financials |
| 7. |
IXJ |
Global Healthcare |
| 8. |
IXP |
Global Telecom |
| 9. |
IYK |
Consumer Goods |
| 10. |
IYR |
Real Estate |
| 11. |
IYT |
Transportation |
| 12. |
IYZ |
Telecom |
| 13. |
PBJ |
Food & Beverage |
| 14. |
PBS |
Media |
| 15. |
PBW |
Clean Energy |
| 16. |
PEJ |
Leisure & Entertainment |
| 17. |
PJP |
Pharmaceuticals |
| 18. |
PSJ |
Software |
| 19. |
XLB |
Materials |
| 20. |
XLE |
Energy |
| 21. |
XLF |
Financial |
| 22. |
XLI |
Industrial |
| 23. |
XLK |
Technology |
| 24. |
XLP |
Consumer Staples |
| 25. |
XLU |
Utilities |
| 26. |
XLV |
Health Care |
| 27. |
XLY |
Consumer Discretionary |
| Style Portfolio
| 1. |
IVV |
S&P 500 |
| 2. |
IVW |
S&P 500 Growth |
| 3. |
IVE |
S&P 500 Value |
| 4. |
IJH |
S&P 400 |
| 5. |
IJK |
S&P 400 Growth |
| 6. |
IJJ |
S&P 400 Value |
| 7. |
IJR |
S&P 600 |
| 8. |
IJT |
S&P 600 Growth |
| 9. |
IJS |
S&P 600 Value |
| 10. |
IWV |
Russell 3000 |
| 11. |
IWZ |
Russell 3000 Growth |
| 12. |
IWW |
Russell 3000 Value |
| 13. |
IWB |
Russell 1000 |
| 14. |
IWF |
Russell 1000 Growth |
| 15. |
IWD |
Russell 1000 Value |
| 16. |
IWR |
Russell Midcap |
| 17. |
IWP |
Russell Midcap Growth |
| 18. |
IWS |
Russell Midcap Value |
| 19. |
IWM |
Russell 2000 |
| 20. |
IWO |
Russell 2000 Growth |
| 21. |
IWN |
Russell 2000 Value |
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To combine the individual ETF portfolios into a rational portfolio strategy we use/suggest the following portfolio
allocation process.
To illustrate we’ll assume three funds are selected for each of the three portfolios and that you are fully invested.
If you had $100,000 to commit to this approach, first conceptually cut the sum into three parts, one third for each of
the portfolios or approximately $33,333 each. Then since we are selecting three candidates in each grouping, partition
each section once more, resulting in $11,111 for each of the positions. Thus, your position size within this framework
would be 11.1%.
Conceptually you have a portfolio with three sections, with each section being broken up into three pieces for a total
of nine equal slots. It is important to keep this concept in mind as you go forward; three sections of a third each,
each divided into three positions, for a total of nine equal positions.
The ideal state is a well-diversified relative-strength portfolio consisting of equal-weighted positions. Of course,
this ideal state of equal weighting will only exist for a moment, as market action will immediately start rebalancing
the portfolio and it will be up to us to put it back in balance.
The questions surrounding rebalancing largely concern frequency and size; in other words, how often to rebalance and how much
drift away from the ideal is required before a rebalance is triggered? In the Capital Growth Letter we provide updates on a
weekly basis. However, if you are running this program in a taxable account, tax considerations may require you to balance
less frequently. The bottom line is to do what makes sense given your desire for efficiency, your tax status, the liquidity
of the securities you are using, the commissions you must pay and the time you can devote to the process.
Since the Sector Select ETF Portfolios are long only, we do include a couple of rules to help protect capital in declines.
For example, if we rotate out of a sector because it drops below the middle of the pack, we will not replace it unless there
is a viable candidate with positive momentum. This has two effects: First, it prevents us from buying into a decline by
postponing the purchase until after a rally has been initiated. Second, it serves as an implied allocation mechanism by
lightening up our holdings when momentum is negative.
The current holdings can be found on the bottom of page 11 of the newsletter.
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