Should investors include the momentum managed MTUM in a portfolio? This question came up for discussion and to answer in greater detail I ran a cluster analysis to see if MTUM is highly correlated with any of the ten basic ETFs used to populate the Galileo and Rutherford portfolios.
Cluster Analysis: In addition to the basic 10 ETFs, I included BIV to provide a bond option, but as readers can see, this bond ETF is not needed as it is highly correlated with TIP and TLT. To simplify the portfolio I would remove BIV and stick with TIP and TLT. With inflation as low as it is, even TIP is expendable at this time.
Using 0.7 as the correlation cutoff, this portfolio is broken down into seven (7) clusters. The highest correlations show up between international equities (VEA) and international real estate (RWX) as well as the bond-treasure ETFs. VTI and MTUM currently carry a 0.88 correlation and this is considered highly correlated. Once more, if one is interested in simplifying the portfolio, cull out MTUM and stick with VTI for U.S. Equities exposure.
ETF Rankings: The following table is current as of 8/12/2015 and the recommendation is to invest 100% in SHY or go completely to cash until the next review period. Cash is never a bad option when we are in the “dog days” of summer.
If the market continues trending the rest of the week as it is thus far today, MTUM could snap back into the number one spot. However, the safe move is to remain in SHY or cash.