Questions arise as to how the different ITA portfolios are managed. What are the similarities and what are the differences. Of the fourteen portfolios tracked on this blog, there are more similarities than differences. If one is satisfied with a Lexus, why select a Corvette or even a BMW?
The portfolio management styles range from passive to semi-active (Not including the Hawking, which is quite active.), with the Schrodinger as the passively managed example. At this time the Schrodinger does not employ any type of risk reduction model such as using SHY as the cutoff ETF or the ITARR model. That may change in the near future. At this point the goal is to keep the percentage allocated to each asset class within the target limits established for this particularly portfolio.
Every portfolio is launched with an asset allocation plan. I call this the Strategic Asset Allocation (SAA) model and the reason for using asset classes instead of sectors is that asset classes include the entire global market, including sectors, but sectors do not include the entire world market. Most of the portfolios, but not all, include the asset classes listed in this recent blog post. Not all portfolio include international bonds and precious metals. If GLD or PCY is purchased, they are slotted into commodities and bonds respectively.
Portfolios are reviewed every 33 days. This time frame avoids wash sales, short-term trading commissions on commission free ETFs, and it minimizes, but does not eliminate, the whipsaw. By selecting something over a monthly review the portfolio update rotates through the month so changes do not always occur at the end of the month as so often happens with many managers.
Since the Feynman Study, all portfolios, with exception of the Schrodinger, Copernicus, and Pasteur, use SHY as the cutoff ETF. ETFs under-performing SHY are sold out of the portfolio except for the few shares used to calculate the ITA Index.
Vanguard ETFs form the bulk of the available securities as they meet our index standards, are low cost, and many are commission free for TD Ameritrade clients – of which I am one. The other favorite family is iShares and some of those have been in one or more portfolios for over ten years.
While the SAA may vary from portfolio to portfolio, all are skewed toward the value side of the investing spectrum. In addition, most carry a high percentage of mid- and small-cap stocks. The logic behind this portfolio tilt is based on Fama-French research. Due to low interest rates, the percentage allocated to bonds is lower than it was some years ago, although I never have been all that high on bonds. If one is not using the ITARR model or SHY as the cutoff ETF, then it is prudent to carry a higher percentage in bonds than used here at ITA.
For the numerous semi-actively managed portfolio the following process is followed.
- Check the current allocations and compare with target percentages.
- Run an Efficient Frontier analysis and observe the projected Return/Volatility ratio with respect to an optimized R/V ratio.
- Run a Cluster Weighting Momentum model to see which low-correlated ETFs are high priority for investment.
- Check the ETF rankings to see if any ETFs are under-performing SHY and need to be sold out of the portfolio.
- Run the ETF Ranking spreadsheet for additional recommendations and see if any red flags are flying in the Exponential Moving Average and Golden Cross columns.
- Check the Absolute Acceleration percentages and avoid ETF with negative momentum.
- When possible, make no changes so as to minimize taxable events, bid-ask slippage, commissions, and dumb moves.
To see how the various portfolios are managed, it is best to track the blog write-ups over several months until you have a feel for the process.