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The Bright Side Of Volatility

Stock markets around the world have had a bumpy ride so far in 2016. The CBOE Volatility Index (often called the “VIX”), a measure of expected stock market volatility, has doubled since early November , and US stocks have fallen more than 10% since the start of the year. These kinds of changes can be gut-wrenching and can make it difficult to maintain a long-term perspective. But for some investors who are able to do so, there’s a bright side to volatility. If you’re periodically investing money, such as putting a portion of each paycheck into a 401(k) account, volatility isn’t necessarily bad. When markets fall you’re able to acquire more shares, giving you “more bang for your buck.” This concept is similar to ” dollar-cost averaging ,” where the average price you pay for an investment will be less than the average of the prices at each of the times you’re investing (because you’re acquiring more shares when the price is low and fewer shares when the price is high). Compared to if markets just blandly moved in a straight line, the ups and downs allow your periodic investments on average to go farther. Of course, there are a few caveats to this volatility fairy tale. First, it assumes that the market will end up in the same place regardless of how much volatility there is. This assumption is clearly sometimes false; stock markets would almost certainly be higher right now if the beginning of this year had been a paragon of financial tranquility. But over the long term it’s approximately true. Stock prices 20 years from now are unlikely to be massively affected by how much stock market volatility there was in 2016. Second, the potential benefits of volatility only apply if you have a long time horizon for your investments. If instead you need the money in the near future and markets plunge, the fact that you can then get more bang for your buck won’t do much good. Perhaps the most important caveat, however, is that you need to be able to stick to your strategy of periodically putting more money into the market. When the kind of turbulence that’s characterized stock markets this year arrives, it can be tough to invest money knowing that one wild day of market moodiness might eliminate a chunk of it. But those who are able to continue making periodic investments can benefit in the long run.

Global X Adds Emerging Markets To Scientific Beta Suite

Global X Funds is planning to add to its suite of Scientific Beta ETFs with a new fund focusing on emerging markets. According to a January 20 filing with the Securities and Exchange Commission (“SEC”), the Global X Scientific Beta Emerging Markets ETF should begin trading sometime in early April 2016, if not before. Suite of Scientific Beta ETFs Like its other Scientific Beta ETFs, Global X’s Emerging Markets ETF will track a custom index: the Scientific Beta Emerging Multi-Beta Multi-Strategy Equal Risk Contribution Index. The index’s objective is to outperform traditional market capitalization-weighted indexes, with a “limited amount of relative risk.” The index’s components are large- and mid-cap stocks that are highly liquid and trade in and are incorporated or domiciled in an emerging-market country. Index components are selected by applying four factors that have been widely recognized by academic literature to outperform over the long run: Value, Size, Low-Volatility and Momentum. Under normal circumstances, the fund will invest at least 80% of its assets in securities from the index, along with American Depository Receipts (“ADRs”) and Global Depository Receipts (“GDRs”). Global X’s other Scientific Beta ETFs launched on May 12, 2015. They include: Global X Scientific Beta US ETF (NYSEARCA: SCIU ) Global X Scientific Beta Europe ETF (NYSEARCA: SCID ) Global X Scientific Beta Japan ETF (NYSEARCA: SCIJ ) Global X Scientific Beta Asia ex-Japan ETF (NYSEARCA: SCIX ) Above Average Performance For the six months ending January 31, 2016, all four ETFs posted losses – but all four ranked in the top half of their Morningstar categories, too. SCIU and SCID posted respective six-month losses of 7.87% and 9.42%, but ranked in the top 41% and 31%, respectively, of their peers. SCIJ posted the lightest losses at 2.61% and ranked in the top 17%. And SCIX, though it nearly posted the steepest six-month losses at -9.41%, ranked in the top 1% of its Morningstar category for the period under review. Past performance does not necessarily predict future results. Jason Seagraves contributed to this article.

Momentum Portfolio Update

In 2011, Scott’s Investments began tracking a momentum portfolio which ranks a basket of ETFs based on price momentum and volatility. In 2014, I also introduced a pure momentum system, which ranks the same basket of ETFs based solely on 6-month price momentum. The first portfolio was previously called the “ETFReplay.com Portfolio”, but going forward, it will be called the “Conservative Momentum Portfolio” (or “6/3/3 strategy”) to reflect some changes in the portfolio and tracking methodology for both portfolios detailed below. In previous years, the Conservative Momentum Portfolio began with a static basket of 14 ETFs. The basket of 14 ETFs will be reduced to 10 ETFs. This change is being made in order to further simplify the portfolio. The 10 ETFs are listed below: RWX SPDR Dow Jones International Real Estate ETF PCY PowerShares Emerging Markets Sovereign Debt Portfolio ETF EFA iShares MSCI EAFE ETF EEM iShares MSCI Emerging Markets ETF VNQ Vanguard REIT Index ETF TIP iShares TIPS Bond ETF VTI Vanguard Total Stock Market ETF GLD SPDR Gold Trust ETF TLT iShares 20+ Year Treasury Bond ETF SHY iShares 1-3 Year Treasury Bond ETF The ETFs will still be ranked by 6-month total returns (weighted 40%), 3-month total returns (weighted 30%), and 3-month price volatility (weighted 30%). The top 3 will be purchased at the beginning of each month, and if a holding drops out of the top 3 at the next month’s rebalance, it will be replaced. Previously, the portfolio purchased the top 4 ETFs and only sold when a holding dropped out of the top 5. In addition, ETFs previously had to be ranked above the cash-like ETF ((NYSEARCA: SHY )) in order to be included in the portfolio. This requirement will be removed, so the top 3 ETFs will be held regardless of proximity to SHY. Pure Momentum System The pure momentum system previously ranked ETFs based solely on 6-month price momentum. For 2015, the strategy will rank ETFs based on 5-month price momentum. There is no cash filter in the pure momentum system, volatility ranking, or requirement to limit turnover. Previously, the strategy bought the top 4 ETFs each month – going forward, the top 3 ETFs will be purchased. The portfolio and rankings are posted on the same spreadsheet as the 6/3/3 strategy. The portfolio names are dropping “ETFreplay.com” because the strategy can be tracked on multiple website. ETFReplay.com is still an excellent choice for tracking and backtesting the strategies detailed. However, a formidable free option for backtesting these strategies has emerged at Portfolio Visualizer . The current top 3 ETFs are listed below for each strategy: Conservative Momentum TIP iShares Barclays TIPS Bond Fund SHY iShares Barclays 1-3 Year Treasry Bond Fund TLT iShares Barclays 20 Year Treasury Bond Fund Pure Momentum PCY PowerShares Emerging Markets Bond TLT iShares Barclays 20 Year Treasury Bond Fund VNQ Vanguard MSCI U.S. REIT The current portfolios are below: Conservative Momentum Position Shares Avg. Purchase Price Purchase Date TIP 38 111.2 2/1/2016 TLT 32 126.67 2/1/2016 SHY 49 84.36 12/31/2015 Pure Momentum Position Shares Purchase Price Purchase Date PCY 117 27.65 8/31/2015 TLT 25 126.67 2/1/2016 VNQ 40 79.89 10/30/2015 Current signals can be viewed on Scott’s Investments here . Disclosure: None.