Short-Term Performance of ETF Portfolios: Week 2

Last week we started tracking the performance of 2 portfolios generated from “component” Asset Lists assembled for construction of the Hawking Portfolio. The purpose of this short-term tracking exercise was to see if we could learn anything from the short-term performance that might help us in the final construction of the Hawking portfolio.

Let’s take a look at how the portfolios reviewed last week have performed through the low-volume Thanksgiving week and the Black Friday consumer buying period. Historically, this has been a period in which US stock markets have drifted slowly up – and this trend was confirmed in the last week with the S&P 500 (represented by SPY) being up 0.11%.

The first asset list we looked at was the “Style” asset list that was broken down into only 4 clusters – so this is the maximum number of assets that can be held in this portfolio. After 2 weeks, the performance of this portfolio is as shown below.

This portfolio is up 1.93% in 2 weeks – from 0.72% last week (+1.21% on the week). SPY (representing the S&P 500) is up 0.92% from 0.81% last week (+0.11% on the week). In contrast to last week our “diversified” portfolio is now showing higher returns than our benchmark index.

We also looked at the same asset list filtered by SPY – to see if this might help us beat our benchmark index. This reduced our portfolio to 3 ETFs and the current performance is shown below.

This portfolio is up 2.16% in the last 2 weeks and 1.44% in the last week (4 trading days).

Moving on to our Hawking “Sector” asset list we now have a “standard” portfolio of 10 assets (1 each from the 10 clusters) with a performance to date as shown below.

This portfolio has a 2 week return of 0.72% (compared to 0.92% for the S&P 500) up 0.21% from 0.51% last week. While the return over the last week is slightly better than SPY (0.21% vs 0.11%) the 2 week performance still trails the S&P 500. Thus “diversification” does not seem to be helping us – at least over this very short-term review period.

If we apply the SPY momentum filter we see the performance of the resulting 5 ETF portfolio below.

This portfolio shows a 1.06% 2-week return (up from 0.65% last week) – better than the 10-asset portfolio above and also slightly ahead of the S&P 500 (at 0.92%). However, performance significantly trails the performance of the “Style” portfolios – but this is very short-term so we will continue to follow possible trends in the future.

For interest, the best performing asset “sub-list” to date is the International (Developed Market) Asset list with SPY filter. This 3 ETF portfolio is showing a 2.44% 2-week return as shown below.

It is far too early to confirm any trends from this analysis but 2 questions are worth asking:

1. Is there any benefit from “diversifying” through adding more assets? We need to remember that the “diversification” within the US Equity Market asset group is not “true” diversification since correlations are very high.

2. Is it beneficial to restrict a portfolio to a (very) small number of assets? We saw in the Feynman Study that small portfolios (e.g. the Max4) performed very well. At this stage, a similar effect seems to be supported through the Hawking Lists.

Again, for interest, the following are the best (2-week) performing ETFs that I’m tracking:

GREK (Greece) – 5.74%

HAO (China Small Cap) – 4.72%

EWY (South Korea) – 4.56%

EWG (Germany) – 3.79%

KRE (Regional banks) – 3.78%

ITA 🙂 (US Aerospace & Defense) – 3.50%

Surprised? Note the weighting towards International (Developed and Emerging) Equity Markets

David