Beginning with over 120 ETFs, what projections come out of an Efficient Frontier analysis if the tranche momentum recommendations are placed in the Hoadley optimizer? Below is such an analysis. From the initial quiver of ETFs I screened for the top tranche momentum by breaking the groups into U.S. equities, high yield securities, international equities, bonds, and commodities. This left me with 18 ETFs plus SHY.
I then ran the 18 ETFs through another tranche momentum analysis and here are the recommendations for a $100,000 portfolio based on 9/13/2016 data.
- IJR – 18 shares
- IWN – 130 shares
- BKF – 278 shares
- FXI – 415 shares
- GXC – 142 shares
- FAN – 1491 shares
- REM – 1682 shares
Efficient Frontier: With zero constraints and the assumption the S&P 500 will return 6.0% over the next year, the projections for this sample portfolio is a return in excess of 9.0% with volatility running a tad over 16%. As you can see from the red dot, the optimized portfolio has a return under 5.0% and a risk around 7.6%. Those are stark differences.
Optimized Data: Examining the optimal portfolio and current portfolio, the differences in the recommendations are significant. The Sharpe ratios are similar. If one can handle the volatility, go for the tranche momentum recommendations.