Top 3 Sector Portfolio Strategy

 

 

Our investment strategy is unique.   We invest solely in ETFs, both long and short, with an emphasis on Sectors, as they always outperform indexes.

 

We will also use 2x ETFs, focussing on 2-3 key indexes only (QLD, QID, SSO, SDS) as warranted by market conditions.   

 

In addition to the Top 3 Sector ETF Portfolio, we also feature an all stock portfolio entitled Top 7 Stock Portfolio, utilizing the same criteria for selection of stocks as the Top 3 Sector Portfolio.   

  

LOW COST ETFS ARE THE FUTURE

ETFs are quickly becoming the investment vehicle of choice for both individuals and money managers.  The global ETF market is $5.5 Trillion, and growing rapidly.  

In the past 4 years, ETFs had $2.3 Trillion of inflows, while $1.2 billlion came out of ‘actively’ traded funds.   

WARREN BUFFET BELIEVES IN THE

SP500 INDEX

Warren Buffet is a strong supporter of low cost index ETFs.

In 2011, he made a  $1 Million bet that the SP500 index - SPY - would outperform Hedge Funds over a 10 year time frame.

 

After nearly 10 years, the SP500 rose +85%, while a basket of hedge funds

was only up 22% as of 10/15/17. 

 

Warren won the bet, and gave the $1 M to charity.  (Allthough with compounded gains it ended up being more like $2.6 M).

Warren is quick to point out that a stunning 90% of all hedge fund mgrs have underperformed the SP500 for the last 6 years.

 

He also said no investor, experienced or not, should pay fees to an advisor, when expense ratios are as low as .05% for index ETFs.   

In the next 4 years, the  global ETF market will explode to $8 Trillion according to PWC Research.   There are 93% of investment advisors that now use ETFs, up from 40% in 2006.

 

ETFs will have much more influence over individual stock prices, especially in sectors like Biotech, Energy, and Finance.  The top stock holdings in each ETF will trade in tandem, regardless of the individual cases.  This new trend will transform the equity business into a more sector driven operation.    

The average expense ratio for active funds is .85%.  For passive ETFs it's .17% and for some .05%.  They also offer great protection against individual stock blow-ups, as in biotech stocks, while still capturing the overall biotech sector move.

After years of research, we have created a list of ETFs that cover many sectors and indexes (but certainly not all).   It is a list that contains both 2x and 1x ETFs.

 

And it is from this list that nearly all of our trades are based on: 

 

 

 

 

 

 

PIVOT POINTS

Key to our approach is identifying significant turning points in the broader market.  We call these 'Pivot' points, both high and low.  

 

For instance, 2/11/16 represented a Pivot Low: China devalued,  Oil hit a low of $26 a barrel, and fear of energy loan defaults took the indexes to the lows of the year.   A perfect "wash out" event.  

Another great example of a Pivot Low:  6/27/16.  The "Brexit" crash that took all sectors and averages to 3 month lows.   

 

From the ashes rise the Phoenixes.   We track the sectors that emerge first from the destruction.   A simple concept.    And highly effective.

From this 'ground zero' we apply a unique blend of proprietary indicators consisting of Momentum,  MACD,  RSI and  Money Flow to give us our investing marching orders.

Here's a chart of SPY showing the most recent Pivot High that the SPY

made on 9/20/18 (and and all time high), then the 12/24/18 Pivot Low that

occured on 12/24/18.

 

 

 

 

 

 

 

 

 

WHAT  DOES  "TOP 3 SECTOR"  MEAN?

 

 

The term 'Top 3 Sector Portfolio' comes from a phenomenon we call the  

"Top 3 Effect," where the top 3 sectors that emerge from a pivot high or low, tend to outperform for longer durations.   

 

After a flush out low, the best 3 will continue to outperform 2, 3 or 6 months later.

Here's an example... 

The first time period is from 12/24/18 (the market low) through 11/18/19, which is the 2019 performance.

The second period is more recent - From 8/5/19 through 11/18/19,

about 4 months.  Early August was the most recent low.

  

From Jan. 3 2017 (3 yrs)                 From  12/24/18 to 11/18/19

 

 

 

 

 

 

Let's look first at the first chart from Jan. 3 2017 through 11/18/19, or

the approximate 3 year return:

Best 3 ETFs:   QLD +158%,  Software 106%, Semi's SMH 89%

When you look at Table 2 - Percent return from 12/24/18 to 11/18/19

(approximately the 2015 YTD return), we see:

Best 3 ETFs:  QLD +89%,  Semi's SMH +67%, Builders ITB +59%

 

Point being, that the Top 3 that emerged in the longer 3 year

time frame, tend to continue that out performance as we see in

Table 2.

Note also that the #4 best performing etf was XAR Aerospace, which

was #4 in both time periods.  Additionally, Defense ITA is also in the top 6.

The top 3-6 will vary a bit, but the first off that flush-out low, tend to be

the ones still on top 6 months later, and 12 months later, etc.

One other thing to note, the Top 3 tend to 'pull away from the pack'

as time goes on.  As time increases this divergence increases. 

We have observed this effect over the course of nearly 14 years, giving

more credence to the power of the "Top 3 Sector strategy."

 

 

SHORT OR LONG - WE TAKE ADVANTAGE OF THE TREND

The beauty of this strategy is that we make money in both Bull and Bear markets, as we can switch to short ETFs when a positive trend is ending, or a particular sector is underperforming the rest, whereas the vast majority of mutual funds are long only,  which is a definite disadvantage in a downturn.

SECTORS OUTPERFORM

Since Sectors always outperform indexes, we have a larger portfolio allocation to this area (43%).  

For instance, as seen above, as of 6/28/19 the SP500 is up +24% for the year.  But the Software etf IGV is up 37%. with Semi's up 36%.

Yes, sectors always outperform indexes.

In  normal market conditions, we allocate as follows: 

2   Index ETFs                     (QLD and IVW)

5   Sector ETFs                      (This may vary between 4-6 due to mkt conditions)

2   Dividend Stock  ETFs    (only VIG currently)

2   International ETFs          (Europe and Emerg Mkts - only IEMG now)

Our portfolio allocation is as follows:  

          Index:                 34%

        Sector:                   52%         

        Dividend Stock:    10% ​

        International:          4%

Since this system closely tracks money flows, it is extremely responsive to market turns, and very helpful in determining which sectors are rising, and which are falling.

This portfolio strategy is aggressive, and is recommended for experienced investors,

especially since we employ the 2x ETFs, as well as Inverse ETFs.   

THE POWER OF DIVIDENDS

Dividend Yield ETFs are also critical to outperforming the benchmarks.

Investors are desperate for yield.  We utilize domestic and international dividend stock ETFs (although currently we are in domestinc only).

 

Currently we have VIG for our Dividend Yield allocation. It is yielding 2.2%

and yields 2%, We re-invest all dividends back into the ETF.

 

These ETFs are not only great yield vehicles, but are also strong

capital gains generators, with  VIG - Dividend Appreciation etf up 35%

in the last 2 years, the #1 performer among its peer group.

Another advantage is the tax rate of only 15%, as opposed to interest, which is taxed at your current income level.

The power of re-invested dividends for total return is simply amazing.  

From January 1990 to today (11/18/19 as of this writing), the SP500 is up 810%.

 

Not too bad for a 29 year return.  But wait, add in dividends reinvested, and that SP500 return rises to an astonishing +1,574%!    Yes, it's true.

Dividends should ALWAYS be reinvested.  Always. 

One note about our website:

Many of our followers have asked why our market report doesn’t come out before the opening of the stock market. That is intentional.

 

We like to let the market settle in for a few hours, which generally gives us a more accurate picture of what the trading action will be for the day. As a result you will note that we tend to publish in the 10:30 to 11:30 a.m. window, and sometimes even later in order to fully analyze the market conditions.

 

Oftentimes the initial move off the open is not always the trend for the day.  If a session is particularly volatile, we will often post a follow-up editorial late in te day. We feel that the delayed report gives our followers an edge over the standard news feeds, with more timely information.

 

TACTICAL STRATEGY

 

There are a few things to keep in mind when following this strategy.

2x DOUBLES YOUR  RETURN...  AND YOUR RISK

First and foremost, in some cases, we are investing in 'Ultra' or 2x ETFs.  

This brings added risk in the form of extreme pricing moves. 

 

One example of this is the 2x Biotech etf  BIB.  It is very volatile, with regular swings of  +/- 4% intraday.  Of course one can always use the  1x ETF – IBB,  which is less volatile.   And most of our 2x ETFs have the 1x  version.   

 

Because of this high degree of risk, our strategy is intended for more experienced investors.   Currently, we are only using a small amount of 2x ETFs, notably: 

 

SSO 2x SP500,  QLD 2x Nasdaq, SDS Short SP500 2x, QID Short Nasdaq 2x.

 

We can also short a sector by buying the inverse ETFs (such as short Oil - DUG). 

Shorting tends to be a fast-moving, high- risk venture as well.

Definitely NOT for the beginner.

QUICK RESPONSE TO MARKET TREND CHANGES

 

As Darwin notes, survival of the species is not ‘Only the strong shall survive’, but rather ‘The Organism most effective at adapting to rapid environmental change will survive.’  

 

We need to make decisions quickly as the market turns.  It is imperative to observe sell stops, especially in the inverse ETFs – as losses can mount very quickly when short the market.  It also means acknowledging when you are wrong, and

checking your ego.  

 

That does not mean we are day traders.  We are swing traders and much prefer to stay in positions longer term when possible.  We like to enter  the market at the beginning of a trend change, ride that cycle up, and often we'll be long for 

months (and in some dividend ETFs -  years).

 

But there are times when the market will move rapidly, and we will have to buy or sell positions accordingly.  Sometimes that means holding positions for a period of days, not weeks. 

 

Our Dividend Stock ETF holdings (like VIG) are more long term, as the yield is critical to returns, and these ETFs tend to be much more stable than other stock funds, even in downturns.  

U.S. ETF MARKET NOW $4 TRILLION

 

 

"U.S.-based exchange-traded funds have racked up a record $4 trillion in assets under management as of this year, with 136 ETF providers offering 2,062 ETFs to investors, according to research firm ETFGI.

The Global trotal of ETFs is now $5.7 Trillion.

 

Overall, ETFs are seeing huge interest globally — a trend confirmed by record levels of inflows — and that’s unlikely to die down anytime soon, says Deborah Fuhr, the founder of ETFGI and one of the world’s leading experts on the ETF industry.

 

“I think we’re still in early days of adoption because I think ETFs are now moving to a level playing field,” she said Monday on CNBC’s “ETF Edge.”

 

With the Securities and Exchange Commission watering down its “exemptive relief” rule, which often made the come-to-market process long and arduous for ETF issuers, ETFs are entering a new era that could expand their space even further, Fuhr said.

 

“With the ETF rule coming to market, it really means bringing ETFs out will be as easy as mutual funds,” she said. “I think that you’ll find that different types of products will come to market.”

 

“Today, the ETF industry globally is $2.5 trillion bigger than the hedge fund industry,” Fuhr said. “And if you look at asset-weighted returns of hedge funds as an industry, for the past eight years, they’ve underperformed the S&P [500]. Now, you might not say that’s the right proxy, but, clearly, you’re paying a lot for those funds and they’re still not delivering alpha.”

 

The largest ETF - SPY represents 15% of the entire global ETF market. Spy is up 33% so far this year in 2019, with a 1.8% dividend and a .1% expense ratio. What's not to like?

 

The rush to ETFs, while powerful, has also been fairly narrow, according to Fuhr’s firm. The top 10 ETFs trading on U.S. exchanges account for 28% of total U.S. assets under management, with the top 20 U.S. ETFs accounting for nearly 40% of assets in the space.

 

Same goes for ETF issuers. The top five ETF providers — iShares by BlackRock, Vanguard, SPDR, Charles Schwab and First Trust — preside over 87% of the total assets in the ETF market, with iShares and Vanguard alone managing 65%, ETFGI reports."

 

(Excerpted from CNBC.com 11/8/19)

 

WHAT IS THE EDGE?

 

What gives our strategy an edge over others, is both the unique Market Timing model, as well as the 2x ETF component that can go long or short depending on trading conditions.  

 

As we track money flows into Sector and Index ETFs, we are able to respond faster to market turns and new emerging trends.  As there is an ETF for every sector and industry (perhaps too many), it gives us a big picture perspective on where the hot money is rotating into, and out of as well. 

 

As of this posting, on 11/18/19  our Top 3 Sector Portfolio is up 69%  since the market bottom on 12/24/18.  Not bad for  10 Months, with the SP500 up 33%.

Our Top 7 Stock Portfolio is up 46% from 12/24/18.

Our portfolio is not a 'theoretical' model.  All of our Buy/Sell calls are real time transactions. These are actual trades that we execute in our accounts.  

We try to inform our followers of new buys and sells during the trading day, but due to daytime commitments, sometimes we can only post later in the day.   In most cases we try to be as timely as possible.  

Most importantly, all Buy/Sell orders are given out in our StockTwits account.  So in order to receive them real time, you must follow us at:

http://stocktwits.com/Lach14

 

We will also post  Buy/Sell orders on our Top 3 Sector Portfolio website:

http://www.top3sectorportfolio.com/

This site will also feature special updates and intraday charts on ETFs and stocks, which many of our followers find helpful.  

 

We generally do a morning report around 10:00  - 11:00 am, as well as a late day Report in the last hour of the  trading session.   So check it at least twice a day.

For Real Time Updates, Follow us at:    http://stocktwits.com/Lach14

Or check our site:     http://www.top3sectorportfolio.com/

 

      

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