ETF Country Plus Strategy Insights: Time to Regain Our Balance

James Kimball | June 29, 2015

Both ETF Country models outperformed their benchmark on the way down this week. After looking like they might spring back to life on Monday, Asian markets, with the exception of Japan, spent most of the week selling off.

The U.S. markets gapped up to open the week only to sell off every day thereafter. Greece remains a hot subject with news and rumors of news causing quick intraday rallies and selloffs. There are a number of important deadlines in the coming days and weeks that should help determine if a compromise can be reached with its creditors or if the country will decide to default and/or depart from the European Union.

There were no positions changes this week. We remain heavily concentrated in Asian ETFs.  As of the close on Friday, FXI is about 40 cents from our no-loss stop.



This Week’s Strategy Lesson: Time to Regain Our Balance

This upcoming Wednesday is July 1st. All of our ETF models currently use a calendar-based rebalancing. On the first trading day of January and July, we trim or add to our existing positions until we have an equal amount of capital in each portfolio slot. Let’s go through the reasons behind why we do this and a little about how you can rebalance your own portfolio if you decide that is necessary.

Consistent Money Management Rules

The ETF portfolios are designed for the long-term. That is one reason we carefully back-tested both the concepts and the actual portfolios going back to the beginning of 2007. The model achieves its results through steady growth and compounding combined with consistent application of the money management rules

One of these rules, designed around accommodating the rotational nature of the models, is that when we rotate out of a position and into a new one, the new position uses the same amount of capital as the old position we sold.

This allows us to keep as much of the portfolio invested as possible while minimizing transactions and commissions. But it also means that over-time, the portfolio slots will grow out of balance. This can be especially noticeable if we have one position that does really well while another position is struggling.

Small imbalances are not a big deal and probably help performance as we let the winning positions “run.” But larger imbalances reduce the effectiveness of diversification and can cause one position to have an outsized effect on our performance.

Current Balance of the Models

The models have now been running just about six full months since their last rebalance. Let’s take a look at how they currently stand:
The above pie graphs show how much, in percentage terms, each portfolio position represents of the total of that portfolio.

The Sector Aggressive model is the most out of balance, with almost 20% separating the largest position (CURE) from the smallest position (IBB). The difference in the other portfolios have a much smaller range from about 4% to 10%.

In the Sector Aggressive model, this imbalance was driven both by an incredible run in CURE (up from $31.69 to over $42 now in the last six months) and a series of trades earlier in the year in DRN and TMF that didn’t work well in the portfolio slots that currently houses IBB and SOXL.

Basic Steps to Rebalance

Depending on when you started trading the models, what positions you were in, and how consistently you maintain your position sizing, you may or may not need to worry about rebalancing your own portfolio. You can tally up your positions and their relative sizes and make that determination on your own.

If you do decide to rebalance, here are the basic steps.

  1. Find your current total equity.  This basically entails adding up the total capital you have invested across all three positions (or all three models if you are a Complete member) including cash.

  2. Divide that total equity by the number of positions (three or nine).

  3. Calculate the number of shares you should own based on the number you found in step 2 for each position. For instance, if you have $9000 invested, you should have roughly $3000 in each position. Calculate the number of shares each position should have so that it has roughly $3000 in each position.

  4. Buy or sell shares of each position until your holdings all match the number of shares for each position that you found in step 3.

Again, if the relative position size differences are small in your portfolio, it may not be worth the effort and commissions to rebalance your portfolio. But larger portfolios or ones that are significantly out of balance can definitely benefit from performing this analysis.

Our models will be performing this rebalance across the board on July 1st.

The Current Condition of the Model

There were no position changes this week. Our three positions are FXI, EWH, and EWJ. FXI is near our no-loss stop level.

Both models are in all three positions.

Stay tuned to daily updates for any position changes.

Here is a summary of the weekly performance of all the ETFs that the strategy monitors.


Best wishes for your trading, 

James Kimball