One market conundrum plaguing many new investors is how to invest when markets are expensive and the potential for a downturn is high.
Some choose to employ some sort of market-timing as they await a crash before buying in -–but who knows when the next great buying opportunity will come along. You may have to sit on your cash for years and miss out on some large gains.
The approach I want to talk about in this post is a bond rotation strategy. On one hand, you have the protection that is afforded with bonds while using intelligent techniques to potentially get market like returns. You may have heard about the “Sleep Well” bond rotation strategy at Logical Invest. While the bond rotation strategy I will show you doesn’t deliver the 17% annual returns that theirs does – mine is free and you can customize it. With a little work you could potentially create a system as good as theirs or better.
If you just want to play around with the screen and forget about reading the rest of this article on how it works – no problem.
Just make sure you have signed up with Portfolio123 before you try to access the screen.
My Bond Rotation Universe
What I don’t particularly like about the “Sleep Well” ETF rotation system is that they have a bond universe of just 4 ETFs. To me that feels a little bit like cherry-picking. I can’t pick fault with their impressive results though.
My universe has 3 rules:
- Fixed income ETFs
- Standard long (no leveraged or short funds)
- Dividend yield above 3%
This currently brings up 77 ETFs. If you were to use these rules to invest in all possible fixed income ETFs since 2008 with quarterly rebalancing, your compound annual growth rate would exceed the S&P 500 with an annualized return of slightly under 6%.
My Bond Rotation Ranking System
My bond rotation ranking system is also quite simple with 4 equal-weight parts. Two of the rules were taken directly from the Portfolio123 Price Uptrend ETF ranking system. The other two I added in. One for higher income yield and the last one isolate funds being bought up using the Chaikin Accumulation Distribution formula.
Here are the 4 variables:
- Close(0) / Close(60)
- Ema(20) / Ema (200)
- Income yield
- Chaikin Accumulation Distribution (100 days)
A Small or Large Bond Portfolio
This bond rotation system works fairly well from just a couple of bond ETFs up to about 15. Whether you want just a couple or many is up to you. The chart at the top is with 5 ETFs.
- As of Feb 17th 2017, the recommended holdings are:
- Powershares CEF (PCEF)
- VanEck Vectors Fallen Angle High Yield (ANGL)
- VanEck Vectors Emerging Markets High Yield (HYEM)
- Claymore ETF (BSJM)
- SPDR Bloomberg Barclays High Yield (JNK)
If you have found this post useful, please let me know. Always feel free to drop me an e-mail. And if you figure out some cool tweak you want to share with this bond rotation strategy, I would love to hear about it.