What processes are followed to come up with the ETFs and stocks needed to construct a momentum oriented portfolio? The screening model laid out below is quite different than what I use to build passively managed portfolios such as the Schrodinger. Here are the steps I follow.
- Begin with the “Rutherford 10” as these ten ETFs have been shown to perform quite well when tranche momentum principles are applied.
- Beginning with over 125 ETFs, screen for the top 3 using the tranche momentum model as found in the Kipling Tranche 2.5.1 spreadsheet. Add those three ETFs to the Rutherford 10 to make up what is known as the Baker’s Dozen.
- To add additional diversity we add three to five stocks to the Baker’s Dozen. These few stocks are found using a proprietary value-momentum screen from over 6,500 stocks.
- At this point we have identified 15 to 20 securities for inclusion in the final portfolio.
- To better identify securities for the final portfolio, I frequently run a correlation analysis so as to avoid highly correlated stocks and ETFs. If there is a correlation of 0.80 or higher between an individual stock and ETF, I select the ETF as it provides additional diversity.
- The final 15 to 20 securities are run through the tranche momentum analysis, now familiar to ITA readers, to build the portfolio.
Detailed examples of this process will show up as various portfolios are reviewed over the next several weeks.
Photograph: I am currently in Southern Oregon photographing waterfalls found along Route 138. This scenic highway connects Roseburg and Crater Lake and is known as the Waterfalls Highway.