Effective 4/29, we are launching our third model portfolio, Sector Selector ETF Model Portfolio. We are offering a free trial for 30 days, so please feel free to check it out yourself or to mention it to your friends, family and associates.
The goal of Sector Selector is to beat the S&P 500 using solely ETFs, primarily those representing various sectors of the market. The model may hold up to 25% in cash and must hold a minimum of 50% US equities. A maximum of 10% may be invested in each of the following: Commodity, High-Yield or Bond ETFs. A maximum of 20% may be invested in dollar-denominated Foreign Equity ETFs.
I expect that there will be many similarities to our other two models, but there are some substantial differences:
Similarities
- Same website - www.InvestByModel.com
- Same functionality - trade alerts, easy to figure position sizes
- Same Portfolio Manager - Alan Brochstein
- Diversification
- Performance focus
- Same thoughtful and persistent communication via the blog
Differences
- Fewer positions
- Less turnover
- Less research provided
- Lower subscription fee - just $10
- Lower overall cost (including commissions)
Before I share the initial model (which you can see on the website yourself), I want to explain why we are offering Sector Selector. While I don't expect that anyone who subscribes to our stock-picking models will want to migrate, I do believe that this product will be something to apply to a different bucket, so to speak. The Top 20 style or the Conservative/Growth Balanced style both have a lot of appeal - more than 10% of our subscribers choose both. Still, I understand that there are many reasons why one might not want to put all of ones eggs in a single basket. The ETF model offers a lot more diversification - no security risk. It also gives me some additional flexibility not available in Top 20 with respect to using cash (25% maximum compared to 10%).
Even if it doesn't appeal to those of you who already understand the value proposition and appreciate the performance, we are hopeful that it will open our whole portfolio model process and philosophy to a broader group of investors that might migrate over time to our stock-picking models. We also avoid some of the crowding issues that might arise over time as we get larger - this model is much more scalable in that regard.
If the description above isn't clear, hopefully this explains what we will be doing. My primary decision is to pick sectors of the market that have the most appeal and to adjust over time. Since we are trying to beat the S&P 500, that opens up the possibility of choosing between various S&P 500 sectors (like the SPDR funds). We can also choose to vary our market-cap exposure, shifting towards Mega-Caps or Small-Caps. Finally, we have included a few other areas, with limited potential exposures, including commodities, bonds, high-yield, or international stocks (dollar-denominated though).
I have shared some long-term goals for the other models in the past, suggesting that I aim for S&P 500 plus 12-20% for the Top 20 and a bit lower for CG/B (since we use bond ETFs and can't really add value in security selection on a large part of the portfolio). For Sector Selector, my expectations are that we can beat the S&P 500 on a gross basis by 3-5% a year (including embedded ETF fees that typically are 0.2-0.3%). To me, that type of performance over time would more than justify the price ($120 per year) for accounts larger than $25,000 (the math suggests possibly even lower, but it depends upon transaction costs).
The initial model looks like this:
- PSCI - 5%
- XLG - 20%
- VWO - 15%
- XLK - 21%
- XLF 16.5%
- XLV - 7%
- XLY - 7.5%
- XLU - 5%
- Cash - 3%
So, let me tell you whatwe are trying to accomplish. For those familiar with the structure of the other models, you will most likely detect a lot of consistency. PSCI is Small-Cap Industrials - which are big in the Top 20. XLG gets us the Mega-Cap exposure I have added to Top 20 and that is a great part of CG/B. VWO gets us into a trade I like right now - Emerging Markets, which I expect can beat the S&P 500 over the balance of this year by 10-15%. The other five ETFs represent the sectors. We have exposure through XLG to all the sectors. The balance is heavily weighted towards Technology (XLK) and Financials (XLF). We have no Energy, Materials or Industrials and no Consumer Staples, and we have below-market exposure to Health (XLV) and Consumer Discretionary (XLY). Utilities (XLU) account for the rest - a slight overweight that is designed to compensate for our lack of exposure to Telecom Services.
Let me know what you think! We are excited about where we are headed, with ideas for an income model as well as a hedged model in the development phase. We have received terrific feedback regarding our website redesign, which we continue to enhance. So, please check out Sector Selector ETF Model and help us to spread the word.
Thanks,
Alan Brochstein
www.InvestByModel.com