by Will Ashworth | March 29, 2012 9:59 am
Do you Twitter regularly? If so, being an investor as well, it’s likely you’re familiar with StockTwits, the popular investment website founded by Howard Lindzon that uses social media to allow investors to share information. A by-product of this success is the StockTwits 50, a weekly list of 50 companies with strong fundamental and technical characteristics.
It’s a surprisingly diverse group, so I thought it might be interesting to create a $100,000 portfolio of ETFs to replicate it and then look back at the past five years to see how that portfolio would have performed.
After analyzing the group of 50 stocks, I realize I have my work cut out for me. A total of six sectors are represented on the list, with the largest number (18) of stocks in technology, which makes sense given that StockTwits is all about using technology to bring investors together. A close second is the services sector, with 14. Together, these two represent 64% of the list. Any ETF I choose will have to have a high concentration in both of these.
Further, the investment style is quite evenly split, with large caps and small caps each with 15 companies, mid-caps with 14 and micro-caps just six. It’s definitely a multi-cap portfolio. ETFs of that variety are difficult to find.
The one thing I don’t want to do is take the easy way out by selecting a total market ETF that happens to resemble the list’s composition. I’d rather break it up into several ETFs.
The other difficulty is the media tend to identify stocks differently than in the investment business. Let’s use Whole Foods (NYSE:WFM) as an example. We all know it as a grocery store. However, Morningstar labels it as part of the “consumer defensive” sector. But the Guggenheim Russell MidCap Equal Weight ETF (NYSE:EWRM) considers it in the “consumer staples” sector, and Yahoo Finance has it as part of the “services” sector. No wonder the investment business is so poorly thought of, it can’t even agree on sector names!
When I bring all my analysis together, I come up with the following four ETFs for my hypothetical $100,000 investment:
PowerShares Dynamic Leisure and Entertainment Portfolio (NYSE:PEJ)
The services sector accounts for 28% of the StockTwits 50. In order to best duplicate it, I’ll put $10,000 in this consumer discretionary fund. The fourth-largest holding is Chipotle Mexican Grill (NYSE:CMG), one of the StockTwits 50, at a 5.1% weighting. It’s a little heavy on restaurants, but long-term it should still do quite well.
PowerShares Dynamic Consumer Staples Sector Portfolio (NYSE:PSL)
Another $10,000 of my ETF portfolio will go to this consumer staples fund. Its third-largest holding is Philip Morris International (NYSE:PM), another of the StockTwits 50. Other holdings from the ST50 include Monster Beverage (NASDAQ:MNST), Herbalife (NYSE:HLF) and Whole Foods.
Dow Jones U.S. Technology Sector Index Fund (NYSE:IYW)
A total of 15 of the 18 technology stocks in the ST50 are software businesses. Therefore, as the biggest weighting, I need to find a tech fund that clearly represents the software industry. I think I’ve found it in this popular iShares fund. With total net assets of $1.7 billion, it’s in the ETF big leagues. Software and computer services account for 42% of the fund’s holdings, with the remainder in technology and hardware.
Because software companies represent 30% of the ST50, and the iShares fund splits software and hardware almost down the middle, I’m going to allocate $48,000 of my hypothetical $100,000 investment toward this fund. It’s higher than the 36% I was shooting for, but more accurately reflects the high concentration of software stocks.
Guggenheim S&P 500 Pure Growth ETF (NYSE:RPG)
Finishing up the task at hand, I’ll put $32,000 into this Guggenheim fund that seeks to invest in the S&P 500′s growth stocks. Its second-biggest sector holding is health care at 23% of the portfolio. It’s not a perfect match to the four remaining sectors, but it’s pretty darn close.
A $100,000 investment put into these four ETFs at the end of 2006 was worth $121,268 at the end of 2011. That’s an annualized return of 3.93% compared to a loss of 0.25% for the S&P 500. Thanks to the StockTwits 50 for this little bit of inspiration.
As of this writing, Will Ashworth did not own a position in any of the stocks named here.
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