ETF Portfolio Optimization. January 20xx

Transcription

1 ETF Portfolio Optimization January 20xx

2 ETF Portfolio Optimization Table of Contents 1. Legal Considerations Target audience Underlying principles Imposed constraints Detailed approach Findings... 8 Summary... 8 Target annual return = 4% Target annual return = 6% Target annual return = 8% Target annual return = 10% Target annual return = 12% Target annual return = 14% Target annual return = 16% Target annual return = 18% Next steps Attachments Copyright etftopportfolios.com Page 1

3 1. Legal Considerations Seller s Disclaimers All investments entail risks. ETF Portfolio Optimization Past performance of an investment security or portfolio may not provide an accurate estimate of future performance. Opinions expressed herein are current opinions as of the date appearing in this material only and are subject to change without notice. Reasonable people may disagree about the opinions expressed herein. In the event any of the assumptions used herein do not prove to be true, results are likely to vary substantially. There is no guarantee that investment strategies will achieve the desired results under all market conditions. Every investor should evaluate his/her ability to invest for a long term, especially during periods of a market downturn. We make no representation that strategies identified herein will or are likely to achieve profits, losses, or results similar to those discussed, if any. No part of this document may be reproduced in any manner, in whole or in part, without our prior written permission. This information is provided with the understanding that you will make your own independent decision with respect to any course of action in connection herewith and as to whether such course of action is appropriate or proper based on your own judgment, and that you are capable of understanding and assessing the merits of a course of action. We do purport not to provide broker/dealer, consulting or any related services. You may not rely on the statements contained herein. We shall have no liability for any damages of any kind whatsoever relating to this material. You should consult your advisors with respect to these areas. By accepting this material, you acknowledge, understand and accept the foregoing. Purchaser s Rights Neither this report, its contents nor the corresponding source data may be distributed or resold without the express written consent of etftopportfolios.com. Copyright etftopportfolios.com Page 2

4 ETF Portfolio Optimization 2. Target audience The purpose of this report is to provide objective guidance to those investors who: understand successful investing requires tradeoffs between risk and reward subscribe to the key tenets of modern portfolio theory want to avoid bad investment choices based on emotion or slick marketing pitches seek to maximize their long term investment performance by minimizing unnecessary investment risk and unnecessary investment cost This report is definitely not intended for speculative investors who: believe guaranteed returns are achievable in financial markets seek to time the market seek to get rich quick believe they can beat the market over sustained periods Copyright etftopportfolios.com Page 3

5 3. Underlying principles ETF Portfolio Optimization Our approach is grounded in the following principles. If you disagree or are uncomfortable with any of these assumptions, then this report will be of little to no use for you. However, if you are comfortable with these assumptions, then the findings herein are likely to be highly useful in building your investment portfolio. Please review these assumptions and ensure you are comfortable with each of them before proceeding. Financial markets are generally efficient. There are no free lunches and no can t lose opportunities in efficient financial markets. Institutional investors have the benefit of formal training, years of professional experience, 40+ hours every week of attention, and staffs of research analysts. As a result, it is highly unlikely that an individual investor, lacking such advantages, can outperform institutional investors over time. The performance of most institutional investors will lag passive market benchmarks over time. Individual investors can maximize their net investment gain by eliminating unnecessary investment costs and eliminating diversifiable investment risks. Individual investors can dilute their risk exposure to individual securities (stocks, bonds, etc.) by utilizing security baskets versus individual securities. Individual investors can minimize investment costs by utilizing passively managed, index-based security baskets versus actively managed security baskets. More specifically, individual investors can avoid the management fees and load fees associated with mutual funds by utilizing Exchange Traded Products (primarily ETF s, but including other exchange traded products such as ETN s). As financial markets are generally efficient, the historic performance of market indices and passively managed security baskets provides a reasonable proxy for their future performance. Correlations of historic returns for distinct security classes can be used as reasonable proxies to predict future correlations. Correlations across securities can then be used to reduce the overall volatility of candidate security portfolios (i.e. to minimize diversifiable risk ). Copyright etftopportfolios.com Page 4

6 4. Imposed constraints ETF Portfolio Optimization For reasons of practicality and/or to control investment risk, we have imposed the following constraints upon our analysis: Limited securities considered to Exchange Traded Products (ETF s, ETN s, Commodity Pools, etc.) only. Individual stocks, individual bonds and mutual funds, among other security classes, have been excluded from consideration. Ignored consideration of income tax efficiency. For example, we ve ignored the potential impacts of differential tax treatment for dividend distributions versus share price gains. We ve also ignored the potential impacts of differential tax treatment for municipal bond funds. Limited the maximum size of a portfolio to seven member securities. Limited allocation of any portfolio member to a minimum of 5% of the total portfolio. Limited allocation of any portfolio member to a maximum of 20% of the total portfolio. Limited allocation of any single commodity-based security to a maximum of 5% of a portfolio. Excluded all leveraged and derivative-based securities from consideration. Excluded all securities without at least six years of history to assess performance. Note we have attached text files containing our underlying security performance data should you wish to perform your own analyses without these constraints. Copyright etftopportfolios.com Page 5

7 5. Detailed approach ETF Portfolio Optimization Our analysis was structured as the following sequence of steps: We began by compiling a list of over 1500 Exchange Traded Products (ETF s, ETN s, Commodity Pools, Grantor Trusts, Unit Investment Trusts) listed on publicly traded US exchanges. For each of these securities, we gathered end-of-day prices for the past several years. For securities with limited history, we augmented the security s history with the price history of an associated market index in cases where such an index was specified and available. We adjusted these historical prices to incorporate the effects of share splits, dividends, etc. For each security, we computed key historical performance metrics, namely average total return and return variation (variance), over short, medium and long term periods. We computed the covariations (covariances) of total returns for all 1500 x 1500 = 2.2 million security pairs over the same short, medium and long term periods. We then excluded from further consideration all securities lacking a minimum of six years of augmented, adjusted historical prices. To limit investment risk, we also excluded leverage-based securities or securities based on underlying derivatives, reducing our list of securities to approximately As an additional risk control, we also applied strict allocation limits on commodity-based securities still in our list. For each of a set of explicit target returns, we identified the optimal portfolio of securities from our list of 1300 candidate securities. Note for a seven member portfolio there are approximately = 6.3 x possible security combinations to consider. Furthermore, for each of these possible portfolios, the optimum allocation of investment funds between portfolio members must next be found. To illustrate this point, imagine we have $500,000 to invest. We could simply split this $500,000 evenly between the seven members of our portfolio. In such case, we d allocate 1/7 x $500,000 = $71,428 to each security. Unfortunately, this simplistic allocation scheme is unlikely to maximize the portfolio s performance while minimizing its risk. It probably makes sense to overweight some portfolio members and underweight others, based on your risk tolerance and target rate of return. Consequently, all possible investment allocation possibilities must be considered to find the optimum allocation scheme (maximizing return while minimizing variance) for a portfolio. As you can probably see, this leads to an essentially infinite number of possible solutions to consider. Finding an optimum portfolio is too big a task for even the most powerful supercomputers using conventional brute force approaches. However, by combining elements of artificial intelligence and advanced numerical analysis, we have developed the means to complete this analysis on highly scalable, low cost public cloud computer networks. For each target return scenario we analyzed, we documented the portfolio composition and optimum allocation of funds across portfolio members, computed the projected variation in the Copyright etftopportfolios.com Page 6

8 ETF Portfolio Optimization portfolio s return, and back computed the portfolio s performance over the previous several years. Our latest findings are documented in this report. As a final qualitative check, we then reviewed each portfolio s diversification across geographic region and asset class. Copyright etftopportfolios.com Page 7

9 Std Deviation () ETF Portfolio Optimization 6. Findings Note the findings reported here are based on input data through month end December 20xx. Summary The following chart summarizes total return and corresponding lowest variation of return for each target return assessed in this report. Note variation of return (as measured here by standard deviation) increases sharply as target return increases this variation reflects the increased risk an investor must incur in exchange for the opportunity for higher gain. 7% 6% 5% 4% 3% 2% 1% 0% 4% 6% 8% 10% 12% 14% 16% 18% Average Return () Copyright etftopportfolios.com Page 8

10 -10.0% -8.5% -7.0% -5.5% -4.0% -2.5% -1.0% 0.5% 2.0% 3.5% 5.0% 6.5% 8.0% 9.5% 11.0% 12.5% 14.0% 15.5% 17.0% 18.5% 20.0% 21.5% 23.0% 24.5% 26.0% 27.5% 29.0% 30.5% 32.0% 33.5% 35.0% 36.5% 38.0% 39.5% Proabability Density ETF Portfolio Optimization Assuming a normal distribution, the probability densities of expected returns for these portfolios are then as follows: Target Return 4% 6% 8% 10% 12% 14% 16% 18% 0 Actual Return () Copyright etftopportfolios.com Page 9

11 ETF Portfolio Optimization Target annual return = 4% The following portfolio returned an average of 4% annually over the previous six year period with the lowest volatility: Security Type Trading Symbol Allocation (w) Avg Return (r) Std Dev () Vanguard Muni Bond Fund ETF ABC 20.00% 3.98% 3.00% ishares Lehman 10-Year Treasury Note ETN BUG 19.97% 4.06% 6.37% ishares Morningstar Large Growth Index Fund ETF CID 5.00% 20.81% 14.83% JP Morgan 1-30 Laddered Treasury Portfolio ETF DMN 18.77% 4.36% 8.59% PowerShares Emerging Market ETF ETF EAT 20.00% 0.31% 0.20% CBOE Interest Rate 2-Year Treasury Fund ETF FIG 9.23% 5.20% 34.17% PowerShares DB US Dollar Index Bullish Fund ETF UUP 7.03% -0.12% 8.71% Return correlations () for these securities over the previous six year period were as follows: ABC BUG CID DMN EAT FIG UUP ABC 100.0% 87.6% -1.8% 81.7% 4.1% -85.5% -18.1% BUG 87.6% 100.0% -29.0% 94.7% -1.4% -96.1% 6.3% CID -1.8% -29.0% 100.0% -37.0% -0.2% 29.7% -65.8% DMN 81.7% 94.7% -37.0% 100.0% 1.6% -96.1% 14.9% EAT 4.1% -1.4% -0.2% 1.6% 100.0% 1.2% -12.9% FIG -85.5% -96.1% 29.7% -96.1% 1.2% 100.0% -10.1% UUP -18.1% 6.3% -65.8% 14.9% -12.9% -10.1% 100.0% Combining these individual performances led to the following portfolio-level performance: Por olio return = 4.0% Por olio standard devia on = 0.86% Copyright etftopportfolios.com Page 10

12 Actual Return (Monthly) ETF Portfolio Optimization Actual monthly performance of this portfolio over the previous six plus years is as follows: 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% The diversification profile for this portfolio is as follows: Asset Class Diversity Geographic Diversity 12.3% 6.6% 5.0% 20.0% 18.1% 18.2% 19.7% 100.0% Fixed Income - Government Asset Backed Fixed Income - Municipal Investment Grade Fixed Income - Municipal Floating Rate Fixed Income - Government Medium Term US Equities - Health Care Equities - Energy Commodities - Agriculture Copyright etftopportfolios.com Page 11

13 ETF Portfolio Optimization Target annual return = 6% The following portfolio returned an average of 6% annually over the previous six year period with the lowest volatility: Security Type Trading Symbol Allocation (w) Avg Return (r) Std Dev () Vanguard Muni Bond Fund ETF ABC 20.00% 3.98% 3.00% ishares Lehman 10-Year Treasury Note ETN BUG 19.97% 4.06% 6.37% ishares Morningstar Large Growth Index Fund ETF CID 5.00% 20.81% 14.83% JP Morgan 1-30 Laddered Treasury Portfolio ETF DMN 18.77% 4.36% 8.59% PowerShares Emerging Market ETF ETF EAT 20.00% 0.31% 0.20% CBOE Interest Rate 2-Year Treasury Fund ETF FIG 9.23% 5.20% 34.17% PowerShares DB US Dollar Index Bullish Fund ETF UUP 7.03% -0.12% 8.71% Return correlations () for these securities over the previous six year period were as follows: ABC BUG CID DMN EAT FIG UUP ABC 100.0% 87.6% -1.8% 81.7% 4.1% -85.5% -18.1% BUG 87.6% 100.0% -29.0% 94.7% -1.4% -96.1% 6.3% CID -1.8% -29.0% 100.0% -37.0% -0.2% 29.7% -65.8% DMN 81.7% 94.7% -37.0% 100.0% 1.6% -96.1% 14.9% EAT 4.1% -1.4% -0.2% 1.6% 100.0% 1.2% -12.9% FIG -85.5% -96.1% 29.7% -96.1% 1.2% 100.0% -10.1% UUP -18.1% 6.3% -65.8% 14.9% -12.9% -10.1% 100.0% Combining these individual performances led to the following portfolio-level performance: Por olio return = 6.0% Por olio standard devia on = 1.71% Copyright etftopportfolios.com Page 12

14 Actual Return (Monthly) ETF Portfolio Optimization Actual monthly performance of this portfolio over the previous six plus years is as follows: 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% The diversification profile for this portfolio is as follows: Asset Class Diversity Geographic Diversity 12.3% 6.6% 5.0% 20.0% 18.1% 18.2% 19.7% 100.0% Fixed Income - Government Asset Backed Fixed Income - Municipal Investment Grade Fixed Income - Municipal Floating Rate Fixed Income - Government Medium Term US Equities - Health Care Equities - Energy Commodities - Agriculture Copyright etftopportfolios.com Page 13

15 ETF Portfolio Optimization Target annual return = 8% The following portfolio returned an average of 8% annually over the previous six year period with the lowest volatility: Security Type Trading Symbol Allocation (w) Avg Return (r) Std Dev () Vanguard Muni Bond Fund ETF ABC 20.00% 3.98% 3.00% ishares Lehman 10-Year Treasury Note ETN BUG 19.97% 4.06% 6.37% ishares Morningstar Large Growth Index Fund ETF CID 5.00% 20.81% 14.83% JP Morgan 1-30 Laddered Treasury Portfolio ETF DMN 18.77% 4.36% 8.59% PowerShares Emerging Market ETF ETF EAT 20.00% 0.31% 0.20% CBOE Interest Rate 2-Year Treasury Fund ETF FIG 9.23% 5.20% 34.17% PowerShares DB US Dollar Index Bullish Fund ETF UUP 7.03% -0.12% 8.71% Return correlations () for these securities over the previous six year period were as follows: ABC BUG CID DMN EAT FIG UUP ABC 100.0% 87.6% -1.8% 81.7% 4.1% -85.5% -18.1% BUG 87.6% 100.0% -29.0% 94.7% -1.4% -96.1% 6.3% CID -1.8% -29.0% 100.0% -37.0% -0.2% 29.7% -65.8% DMN 81.7% 94.7% -37.0% 100.0% 1.6% -96.1% 14.9% EAT 4.1% -1.4% -0.2% 1.6% 100.0% 1.2% -12.9% FIG -85.5% -96.1% 29.7% -96.1% 1.2% 100.0% -10.1% UUP -18.1% 6.3% -65.8% 14.9% -12.9% -10.1% 100.0% Combining these individual performances led to the following portfolio-level performance: Por olio return = 8.0% Por olio standard devia on = 2.31% Copyright etftopportfolios.com Page 14

16 Actual Return (Monthly) ETF Portfolio Optimization Actual monthly performance of this portfolio over the previous six plus years is as follows: 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% The diversification profile for this portfolio is as follows: Asset Class Diversity Geographic Diversity 12.3% 6.6% 5.0% 20.0% 18.1% 18.2% 19.7% 100.0% Fixed Income - Government Asset Backed Fixed Income - Municipal Investment Grade Fixed Income - Municipal Floating Rate Fixed Income - Government Medium Term US Equities - Health Care Equities - Energy Commodities - Agriculture Copyright etftopportfolios.com Page 15

17 ETF Portfolio Optimization Target annual return = 10% The following portfolio returned an average of 10% annually over the previous six year period with the lowest volatility: Security Type Trading Symbol Allocation (w) Avg Return (r) Std Dev () Vanguard Muni Bond Fund ETF ABC 20.00% 3.98% 3.00% ishares Lehman 10-Year Treasury Note ETN BUG 19.97% 4.06% 6.37% ishares Morningstar Large Growth Index Fund ETF CID 5.00% 20.81% 14.83% JP Morgan 1-30 Laddered Treasury Portfolio ETF DMN 18.77% 4.36% 8.59% PowerShares Emerging Market ETF ETF EAT 20.00% 0.31% 0.20% CBOE Interest Rate 2-Year Treasury Fund ETF FIG 9.23% 5.20% 34.17% PowerShares DB US Dollar Index Bullish Fund ETF UUP 7.03% -0.12% 8.71% Return correlations () for these securities over the previous six year period were as follows: ABC BUG CID DMN EAT FIG UUP ABC 100.0% 87.6% -1.8% 81.7% 4.1% -85.5% -18.1% BUG 87.6% 100.0% -29.0% 94.7% -1.4% -96.1% 6.3% CID -1.8% -29.0% 100.0% -37.0% -0.2% 29.7% -65.8% DMN 81.7% 94.7% -37.0% 100.0% 1.6% -96.1% 14.9% EAT 4.1% -1.4% -0.2% 1.6% 100.0% 1.2% -12.9% FIG -85.5% -96.1% 29.7% -96.1% 1.2% 100.0% -10.1% UUP -18.1% 6.3% -65.8% 14.9% -12.9% -10.1% 100.0% Combining these individual performances led to the following portfolio-level performance: Por olio return = 10.0% Por olio standard devia on = 2.77% Copyright etftopportfolios.com Page 16

18 Actual Return (Monthly) ETF Portfolio Optimization Actual monthly performance of this portfolio over the previous six plus years is as follows: 4.00% 3.00% 2.00% 1.00% 0.00% -1.00% -2.00% -3.00% -4.00% -5.00% -6.00% The diversification profile for this portfolio is as follows: Asset Class Diversity Geographic Diversity 12.3% 6.6% 5.0% 20.0% 18.1% 18.2% 19.7% 100.0% Fixed Income - Government Asset Backed Fixed Income - Municipal Investment Grade Fixed Income - Municipal Floating Rate Fixed Income - Government Medium Term US Equities - Health Care Equities - Energy Commodities - Agriculture Copyright etftopportfolios.com Page 17

19 ETF Portfolio Optimization Target annual return = 12% The following portfolio returned an average of 12% annually over the previous six year period with the lowest volatility: Security Type Trading Symbol Allocation (w) Avg Return (r) Std Dev () Vanguard Muni Bond Fund ETF ABC 20.00% 3.98% 3.00% ishares Lehman 10-Year Treasury Note ETN BUG 19.97% 4.06% 6.37% ishares Morningstar Large Growth Index Fund ETF CID 5.00% 20.81% 14.83% JP Morgan 1-30 Laddered Treasury Portfolio ETF DMN 18.77% 4.36% 8.59% PowerShares Emerging Market ETF ETF EAT 20.00% 0.31% 0.20% CBOE Interest Rate 2-Year Treasury Fund ETF FIG 9.23% 5.20% 34.17% PowerShares DB US Dollar Index Bullish Fund ETF UUP 7.03% -0.12% 8.71% Return correlations () for these securities over the previous six year period were as follows: ABC BUG CID DMN EAT FIG UUP ABC 100.0% 87.6% -1.8% 81.7% 4.1% -85.5% -18.1% BUG 87.6% 100.0% -29.0% 94.7% -1.4% -96.1% 6.3% CID -1.8% -29.0% 100.0% -37.0% -0.2% 29.7% -65.8% DMN 81.7% 94.7% -37.0% 100.0% 1.6% -96.1% 14.9% EAT 4.1% -1.4% -0.2% 1.6% 100.0% 1.2% -12.9% FIG -85.5% -96.1% 29.7% -96.1% 1.2% 100.0% -10.1% UUP -18.1% 6.3% -65.8% 14.9% -12.9% -10.1% 100.0% Combining these individual performances led to the following portfolio-level performance: Por olio return = 12.0% Por olio standard devia on =3.26% Copyright etftopportfolios.com Page 18

20 Actual Return (Monthly) ETF Portfolio Optimization Actual monthly performance of this portfolio over the previous six plus years is as follows: 6.00% 4.00% 2.00% 0.00% -2.00% -4.00% -6.00% -8.00% The diversification profile for this portfolio is as follows: Asset Class Diversity Geographic Diversity 12.3% 6.6% 5.0% 20.0% 18.1% 18.2% 19.7% 100.0% Fixed Income - Government Asset Backed Fixed Income - Municipal Investment Grade Fixed Income - Municipal Floating Rate Fixed Income - Government Medium Term US Equities - Health Care Equities - Energy Commodities - Agriculture Copyright etftopportfolios.com Page 19

21 ETF Portfolio Optimization Target annual return = 14% The following portfolio returned an average of 14% annually over the previous six year period with the lowest volatility: Security Type Trading Symbol Allocation (w) Avg Return (r) Std Dev () Vanguard Muni Bond Fund ETF ABC 20.00% 3.98% 3.00% ishares Lehman 10-Year Treasury Note ETN BUG 19.97% 4.06% 6.37% ishares Morningstar Large Growth Index Fund ETF CID 5.00% 20.81% 14.83% JP Morgan 1-30 Laddered Treasury Portfolio ETF DMN 18.77% 4.36% 8.59% PowerShares Emerging Market ETF ETF EAT 20.00% 0.31% 0.20% CBOE Interest Rate 2-Year Treasury Fund ETF FIG 9.23% 5.20% 34.17% PowerShares DB US Dollar Index Bullish Fund ETF UUP 7.03% -0.12% 8.71% Return correlations () for these securities over the previous six year period were as follows: ABC BUG CID DMN EAT FIG UUP ABC 100.0% 87.6% -1.8% 81.7% 4.1% -85.5% -18.1% BUG 87.6% 100.0% -29.0% 94.7% -1.4% -96.1% 6.3% CID -1.8% -29.0% 100.0% -37.0% -0.2% 29.7% -65.8% DMN 81.7% 94.7% -37.0% 100.0% 1.6% -96.1% 14.9% EAT 4.1% -1.4% -0.2% 1.6% 100.0% 1.2% -12.9% FIG -85.5% -96.1% 29.7% -96.1% 1.2% 100.0% -10.1% UUP -18.1% 6.3% -65.8% 14.9% -12.9% -10.1% 100.0% Combining these individual performances led to the following portfolio-level performance: Por olio return = 14.0% Por olio standard devia on = 3.84% Copyright etftopportfolios.com Page 20

22 Actual Return (Monthly) ETF Portfolio Optimization Actual monthly performance of this portfolio over the previous six plus years is as follows: 8.00% 6.00% 4.00% 2.00% 0.00% -2.00% -4.00% -6.00% -8.00% The diversification profile for this portfolio is as follows: Asset Class Diversity Geographic Diversity 12.3% 6.6% 5.0% 20.0% 18.1% 18.2% 19.7% 100.0% Fixed Income - Government Asset Backed Fixed Income - Municipal Investment Grade Fixed Income - Municipal Floating Rate Fixed Income - Government Medium Term US Equities - Health Care Equities - Energy Commodities - Agriculture Copyright etftopportfolios.com Page 21

23 ETF Portfolio Optimization Target annual return = 16% The following portfolio returned an average of 16% annually over the previous six year period with the lowest volatility: Security Type Trading Symbol Allocation (w) Avg Return (r) Std Dev () Vanguard Muni Bond Fund ETF ABC 20.00% 3.98% 3.00% ishares Lehman 10-Year Treasury Note ETN BUG 19.97% 4.06% 6.37% ishares Morningstar Large Growth Index Fund ETF CID 5.00% 20.81% 14.83% JP Morgan 1-30 Laddered Treasury Portfolio ETF DMN 18.77% 4.36% 8.59% PowerShares Emerging Market ETF ETF EAT 20.00% 0.31% 0.20% CBOE Interest Rate 2-Year Treasury Fund ETF FIG 9.23% 5.20% 34.17% PowerShares DB US Dollar Index Bullish Fund ETF UUP 7.03% -0.12% 8.71% Return correlations () for these securities over the previous six year period were as follows: ABC BUG CID DMN EAT FIG UUP ABC 100.0% 87.6% -1.8% 81.7% 4.1% -85.5% -18.1% BUG 87.6% 100.0% -29.0% 94.7% -1.4% -96.1% 6.3% CID -1.8% -29.0% 100.0% -37.0% -0.2% 29.7% -65.8% DMN 81.7% 94.7% -37.0% 100.0% 1.6% -96.1% 14.9% EAT 4.1% -1.4% -0.2% 1.6% 100.0% 1.2% -12.9% FIG -85.5% -96.1% 29.7% -96.1% 1.2% 100.0% -10.1% UUP -18.1% 6.3% -65.8% 14.9% -12.9% -10.1% 100.0% Combining these individual performances led to the following portfolio-level performance: Por olio return = 16.0% Por olio standard devia on = 4.76% Copyright etftopportfolios.com Page 22

24 Actual Return (Monthly) ETF Portfolio Optimization Actual monthly performance of this portfolio over the previous six plus years is as follows: 8.00% 6.00% 4.00% 2.00% 0.00% -2.00% -4.00% -6.00% -8.00% The diversification profile for this portfolio is as follows: Asset Class Diversity Geographic Diversity 12.3% 6.6% 5.0% 20.0% 18.1% 18.2% 19.7% 100.0% Fixed Income - Government Asset Backed Fixed Income - Municipal Investment Grade Fixed Income - Municipal Floating Rate Fixed Income - Government Medium Term US Equities - Health Care Equities - Energy Commodities - Agriculture Copyright etftopportfolios.com Page 23

25 ETF Portfolio Optimization Target annual return = 18% The following portfolio returned an average of 18% annually over the previous six year period with the lowest volatility: Security Type Trading Symbol Allocation (w) Avg Return (r) Std Dev () Vanguard Muni Bond Fund ETF ABC 20.00% 3.98% 3.00% ishares Lehman 10-Year Treasury Note ETN BUG 19.97% 4.06% 6.37% ishares Morningstar Large Growth Index Fund ETF CID 5.00% 20.81% 14.83% JP Morgan 1-30 Laddered Treasury Portfolio ETF DMN 18.77% 4.36% 8.59% PowerShares Emerging Market ETF ETF EAT 20.00% 0.31% 0.20% CBOE Interest Rate 2-Year Treasury Fund ETF FIG 9.23% 5.20% 34.17% PowerShares DB US Dollar Index Bullish Fund ETF UUP 7.03% -0.12% 8.71% Return correlations () for these securities over the previous six year period were as follows: ABC BUG CID DMN EAT FIG UUP ABC 100.0% 87.6% -1.8% 81.7% 4.1% -85.5% -18.1% BUG 87.6% 100.0% -29.0% 94.7% -1.4% -96.1% 6.3% CID -1.8% -29.0% 100.0% -37.0% -0.2% 29.7% -65.8% DMN 81.7% 94.7% -37.0% 100.0% 1.6% -96.1% 14.9% EAT 4.1% -1.4% -0.2% 1.6% 100.0% 1.2% -12.9% FIG -85.5% -96.1% 29.7% -96.1% 1.2% 100.0% -10.1% UUP -18.1% 6.3% -65.8% 14.9% -12.9% -10.1% 100.0% Combining these individual performances led to the following portfolio-level performance: Por olio return = 18.0% Por olio standard devia on = 5.76% Copyright etftopportfolios.com Page 24

26 Actual Return (Monthly) ETF Portfolio Optimization Actual monthly performance of this portfolio over the previous six plus years is as follows: 8.00% 6.00% 4.00% 2.00% 0.00% -2.00% -4.00% -6.00% -8.00% % The diversification profile for this portfolio is as follows: Asset Class Diversity Geographic Diversity 12.3% 6.6% 5.0% 20.0% 18.1% 18.2% 19.7% 100.0% Fixed Income - Government Asset Backed Fixed Income - Municipal Investment Grade Fixed Income - Municipal Floating Rate Fixed Income - Government Medium Term US Equities - Health Care Equities - Energy Commodities - Agriculture Copyright etftopportfolios.com Page 25

27 ETF Portfolio Optimization 7. Next steps Now that you ve reviewed this entire report, we suggest you proceed as follows: Re-read the Disclaimers section of this report. Carefully study the detailed findings presented in this report. Compare the projected variance in each portfolio versus its targeted return. Identify the portfolio delivering the highest return for the maximum return variance you can accept. Remember, as a general rule, the shorter your investment time horizon, the less variance (risk in your portfolio return) you should be willing to accommodate. Perform your own research. Recall we ve attached raw ETF performance data to aid you in such research. Based on your research, adjust your portfolio. Once you ve invested, implement a practice of rebalancing your portfolio on a recurring basis. Based on our backward analyses, rebalancing monthly provides little advantage versus rebalancing quarterly but increases your trading costs. Unless your investment portfolio is very large, it probably makes sense to rebalance quarterly. Copyright etftopportfolios.com Page 26

28 ETF Portfolio Optimization Attachments 1. Text file security listing 2. Text file monthly historical performance (adjusted) by security Copyright etftopportfolios.com Page 27