ETF Complete Strategy Insights: How to Follow the ETF Models (Part 2)

James Kimball | June 2, 2019

The ETF Complete model closed the week up +0.1% compared to the SPY which closed down -2.7%.

The SPY closed the week under its 200-Day moving average and at its lowest levels in almost three months, down around 7% from its May 1st high. Continued concerns about tariffs and potential restrictions on trade paired with concerns over a global slowdown were largely responsible for the drop.

Stay tuned for the daily updates and log into the website to see holdings and additional performance data.

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This Week's Strategy Lesson: How to Follow the ETF Models (Part 2)

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This week we continue this short series on how to follow the ETF models.

Any time you start a new system, there is always a learning curve. The question of how to get started in the models has always had its complications. The ETF models don’t have a lot of turnover or frequent new trades in the models (average hold time is about 60-70 days), so waiting for new fresh trades is not ideal and could take months.

We have developed a few tools to help members start a new portfolio or continue to follow along with the models. For your return to match the model portfolio, you need your portfolio to match the model portfolio as closely as possible. You could have the same three positions, but if the position-sizing is significantly different, the ending performance could vary significantly.

Strategy and Money Management Considerations

The ETF models are dynamic, on-going models. Aside from the twice annual rebalancing (January and July), each portfolio slot grows or shrinks based on the positions in them and how they have performed. When we rotate out of one position into another, the new position takes on the cash percentage of the portfolio of the one it replaced.

This will allow for some “drift” in the relative position sizes between the rebalancing. Most of the time the “drift” between positions sizes is relatively small, but sometimes the “drift” can be fairly large whenever a position has a significant positive move. To help current and new traders to start a portfolio that accurately reflects the model portfolio, we have several useful tools and calculators on our site.

Real-Time Portfolio Allocation & Setup

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Our real-time portfolio allocation calculator can be found on the “Tools” section of the model member area on the website. The image above is found in all of the Sector models. It presents the three holdings for each of the model variants, some performance data, and information (green columns) about the real-time allocation of the model and some recommended share totals based on that allocation.

The Complete portfolio can have a maximum of 9 positions, so the real-time portfolio allocation and setup section for that model divides the percentage between all 9 possible positions and cash. Each of the sector models only have three positions that are roughly equal sized aside from the drift that can occur between rebalancing.

The first green column shows each position and the percentage of the total portfolio it occupies. This is useful for starting a new portfolio. Once you have determined how much capital you are going to use to trade the model, you can easily divide the capital by the individual position percentage to figure out how much capital should go into each position. If you are trading $10,000 and the position is 10% of the total portfolio, that position should be about $1,000.

The second green column goes one step further and shows the sample number of shares to buy for each position if you started with a $5,000 portfolio. Most people following along won’t necessarily have exactly a $5,000 portfolio. There are two primary ways that you use the information we provided to calculate exactly how many shares to buy for any sized portfolio.

For easy round numbers, like $10,000 or $20,000, the math to figure out how many shares to buy isn’t that difficult. A $10,000 portfolio is exactly double the $5,000 sample portfolio, so all you would have to do is double the share totals shown in the sample table and your $10,000 portfolio would be apportioned correctly. $20,000 is four times larger than $5,000, so for that portfolio it would be a matter of multiplying the shares totals by four.

We have an additional downloadable tool that will calculate the exact number of shares for any custom-sized account in our trade tracking excel workbook, though that requires some knowledge and familiarity with Microsoft Excel.

Next week, we will cover more information about how to start a portfolio and other considerations as you trade alongside the models.