After reading Jeff’s article on The Ivy Porfolio over at System Trader Success, I have not been able to get the concept out of my head. I even wrote about it for this quantitative trading blog. Then, I actually read The Ivy Portfolio book by Mebane Faber and got the idea further stuck in my head.
I really like the simplicity of the strategy, as well as the fact that I would only have to adjust the positions once per month. It will also be a better strategy for my limited amount of capital.
For those reasons, I am going to put together another live trading experiment where I paper trade two different versions of The Ivy Portfolio over the next few months. The mechanics of both versions will be the same, but one will use Faber’s 10 ETF portfolio and the other will use his 20 ETF portfolio.
Determining The Portfolios
In order to decide which of the ETFs in each portfolio we will actually put money into, I will take an average of the 3-month, 6-month, and 12-month returns. Then, I will put one third of the portfolio into each of the top three ETFs.
In the version that Jeff wrote up, he added a trend filter. I suspect that it will be very rare that the stocks with the best returns over the past 3, 6, and 12 months will be below the trend filter, but just in case I am going to plan on using a 100-day simple moving average for my trend filter.
In order to compile the data to make the average return calculations, I plugged all of the ETFs into a TradeStation Radar Screen that looks like this:
This Month’s Ivy Ten Portfolio
As you can see from this chart, the top three ETFs for the beginning of December are VB, VTI, and VEU.
Their charts look like this:
This Month’s Ivy Twenty Portfolio
The top ETFs for this portfolio are IWC, VB, and VO. Here are their charts:
As you can see, all of the holdings for December are equities based, and most are focused on small- and mid-cap stocks. It’s not surprising that the Ivy Portfolios are trending towards holding these ETFs since they have clearly been on prolonged runs. My only fear is that we might be setting ourselves up to have a bad first month if those equities suddenly tank. If course, I have no business attempting to predict anything, so we’ll just see what happens.