A Low-Cost ETF Portfolio

When we manage portfolios, we don't like to get fancy. Investing doesn't have to be complicated or complex. If you don't understand it, you probably shouldn't own it.

Here's a portfolio comprised mainly of low cost ETFs that we like for the intermediate to long term. The investment strategy is simple and focused: to hedge against inflation and dollar devaluation. We subscribe to the concept that the best ideas are also the simplest.

Here are the two components:

Structure:

• 20 equal weighted positions, since we don't know in advance which ones will be the winners and since this gives us good diversification.

Investment Focus:

• Global markets with above average long term growth potential.
• Positions selected to hedge against inflation and dollar devaluation.

That's it.

We like ETFs for low cost. There are several relatively new niche ETFs that fit the bill, including MENA Frontier Power Shares (PMNA) which corresponds to the Middle East North Africa Index, and the Market Vectors Gulf State ETF (MES). We also like the Claymore Ocean Tomo Patent ETF (OTP), 300 companies with the highest patent ratings (intellectual property over industrial materials), Power Shares Global Agriculture (PAGG), which mirrors the NASDAQ Ag Index (also beneficiaries of long term global demand growth), and the Dow Jones Transportation Index (IYT) (as business picks up, companies like JB Hunt (JBHT), Fed-Ex (FDX) will benefit). That makes 5 of our 20 positions.

Next we continue to recommend the international ETFs and currencies, including the Chinese yuan (CNY), the Singapore dollar, the South African rand and the Indian Rupee, iShares China (FXI), Hong Kong (EWH) Singapore (EWS), South Korea (EWY) or Taiwan (EWT). Add long positions in gold futures and oil futures. If you buy these, make sure that you deleverage your investments by putting up at least 50% margin. Go out to the April '10 contracts.

This adds another 11 positions. Invest $50,000 in each position and don't buy it all at once. Try for three bites.

Keep some powder dry for new ideas that will take us up to our 20 positions.

Comments

[oldman:]

maybe low cost but also high risk. Not for me.

May 21 10:42 AM

[Analyste de...:]

>The investment strategy is simple and focused: to hedge against inflation and dollar devaluation. We subscribe to the concept that the best ideas are also the simplest.

Here are the two components:
Structure:
* 20 equal weighted positions, since we don't know in advance which ones will be the winners and since this gives us good diversification.

Investment Focus:
* Global markets with above average long term growth potential.
* Positions selected to hedge against inflation and dollar >devaluation

I do something similar (strategy) but express it a very different way. I wouldn't call it "simple," but I don't believe the process is too complex for any asset allocator to grasp. If you are determined to diversify with 15-20 options, you've made it easier: the two questions are WHICH OPTIONS? and WHAT WEIGHTINGS?

First, you must decide the broader & narrower asset allocation: what %fxd inc or cash/proxies? what %age intl/emg mkts? what %age commodities? I focus on downside risk and risk tolerance, modeling off lifecycle allocations for a measure suitability - that's a personal & professional bias. Guidelines & benchmarks: you may deviate, but do you track, confirm & correct your idiosyncrasies & unorthodox judgments? In a prudently diversified portfolio, ASSET ALLOCATION practically determines what the weighting of any investment. Studies have shown that <3% unleverage allocation doesn't contribute to portfolio return in a meaningful way. That makes part of the 'weighting' very formulaic 3-7%, for most investment choices.

The investor's goal should be to refine a winning strategy: AVOID flakey calls, wild gambles, willy-nilly BUY/SELL activity. Start with asset allocation that makes sense: finish with investment selections. It's not necessarily easy & quick, but the DIY process isn't so complicated either.

My Model maxlost -15% during the Great Bear Mkt, but its UP +52% since 10/9/07 due to 3 excellent market timing calls (a 20% shift between Ultra Bear & Bull funds.) Across Bear & Bull periods, 55% of the Model allocation was the same funds & stable allocations - the other 45% of the Portfolio was shifts, turnover. Discipline. I moved out of mutual funds and into new sector ETFs as those became available. Adapt! Watch trends, tinker accordingly, and be flexible. Do you have a Bear strategy, already modeled and just-in-case? Be prepared.

May 21 02:03 PM

[Debra J. Di...:]

What makes you think this is high risk? I'm curious.


On May 21 10:42 AM oldman wrote:

> maybe low cost but also high risk. Not for me.

May 21 10:16 PM

[Debra J. Di...:]

I typically hold 20 equal weighted positions. They are built on a case by case basis. The sector weightings, allocations are a result of a combination of a top down and a bottom up approach. I do not start out with a pre-determined idea for the amount I want to invest in commodities, fixed income etc. The portfolio grows out of a selection of my best ideas.


On May 21 02:03 PM Analyste de Boston wrote:

> >The investment strategy is simple and focused: to hedge against
> inflation and dollar devaluation. We subscribe to the concept that
> the best ideas are also the simplest.
>
> Here are the two components:
> Structure:
> * 20 equal weighted positions, since we don't know in advance which
> ones will be the winners and since this gives us good diversification.
>
>
> Investment Focus:
> * Global markets with above average long term growth potential.<br/>
> * Positions selected to hedge against inflation and dollar >devaluation
>
>
> I do something similar (strategy) but express it a very different
> way. I wouldn't call it "simple," but I don't believe the process
> is too complex for any asset allocator to grasp. If you are determined
> to diversify with 15-20 options, you've made it easier: the two
> questions are WHICH OPTIONS? and WHAT WEIGHTINGS?
>
> First, you must decide the broader &amp; narrower asset allocation:
> what %fxd inc or cash/proxies? what %age intl/emg mkts? what %age
> commodities? I focus on downside risk and risk tolerance, modeling
> off lifecycle allocations for a measure suitability - that's a personal
> &amp; professional bias. Guidelines &amp; benchmarks: you may deviate,
> but do you track, confirm &amp; correct your idiosyncrasies &amp;
> unorthodox judgments? In a prudently diversified portfolio, ASSET
> ALLOCATION practically determines what the weighting of any investment.
> Studies have shown that <3% unleverage allocation doesn't contribute
> to portfolio return in a meaningful way. That makes part of the 'weighting'
> very formulaic 3-7%, for most investment choices.
>
> The investor's goal should be to refine a winning strategy: AVOID
> flakey calls, wild gambles, willy-nilly BUY/SELL activity. Start
> with asset allocation that makes sense: finish with investment selections.
> It's not necessarily easy &amp; quick, but the DIY process isn't
> so complicated either.
>
> My Model maxlost -15% during the Great Bear Mkt, but its UP +52%
> since 10/9/07 due to 3 excellent market timing calls (a 20% shift
> between Ultra Bear &amp; Bull funds.) Across Bear &amp; Bull periods,
> 55% of the Model allocation was the same funds &amp; stable allocations
> - the other 45% of the Portfolio was shifts, turnover. Discipline.
> I moved out of mutual funds and into new sector ETFs as those became
> available. Adapt! Watch trends, tinker accordingly, and be flexible.
> Do you have a Bear strategy, already modeled and just-in-case? Be
> prepared.

May 21 10:19 PM

[Analyste de...:]

Debra-
"20 equal weighted positions" = 5% per investment, an arbitrary stake from an asset allocation standpoint. That's a gambler's rationale, btw.

"I do not start out with a pre-determined idea for the amount I want to invest in commodities, fixed income etc. The portfolio grows out of a selection of my best ideas." Its not clear where you demonstrate investment discipline in the allocation process - it's just an ego exercise? Expecting clients to accept 20 gambles on faith doesn't sound reasonable to me - but yes, oldman is quite correct, this is an extremely aggressive, risky investing strategy.

Most advisors apply abit more structure in their portfolio design, however, because asset allocation plays a far greater role in long term performance than individual investment selection.

The prudent investor already knows that, too. hth.

May 25 09:48 PM