Equity ETF Selection

As I shared in a previous post, Mark and I have been on a journey of selecting a portfolio of ETF’s to include in the modified three bucket approach.

After various iterations and experiments, we have settled on a “Magic 8” as the Equity portion of the portfolio (our buckets 3 and 4).  At the core of the eight (8) are a set of five (5) sector ETFs from George Dagnino with one substitution:

  • XLU – Utilities Select Sector
  • XLV – Healthcare Select Sector
  • XLY – Consumer Discretionary Sector
  • XLP – Consumer Staples Sector
  • VNQ – Real Estate (replacing IYR) because it has a higher distribution yield, lower expense ratio and higher returns.

Also based upon previous iterations, we have added:

  • GLD – Gold because of is not correlated with the other sectors. This is one of the places where the model invests in down markets.
  • XLK – Technology because it has been the most profitable in previous iterations.
  • FDL – First Trust Morningstar Dividend Leaders because of the dividend production and performance in the model.

Following is the Asset Correlation from PortfolioVisualizer.com.  The desire is that the correlation be less than .70 and which we have accomplished with a few exceptions.

With the above, the back testing of the model starting in 1/1/2003 produces the following results (from AmiPro):

  • RAR=8.84%
  • Trades = 142
  • Win% = 56%
  • MaxDD% = -11.89%
  • AvgBarsHeld = 144

And from Portfolio Slicer:

In previous iterations, we included a set of bond-based ETF’s for out Bucket2 – fixed income – and have concluded that this portion of the retirement portfolio is better suited for a different model.  We have selected five (5) ETF’s for this portion of the portfolio and are re-fining it now.  Once completed, we will create a separate post.

Both the equity and bond portfolios and the results from the latest iteration are included in the attached Power BI file.  You will need to download and install the free desktop version of Power BI to open it.  Do not attempt to refresh if you so since it connects to data in my personal OneDrive (and it will fail).


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