Building a 'Permanent Portfolio' Using ETFs

by: MyPlanIQ

The permanent portfolio strategy, first proposed by Harry Browne in his Fail-Safe Investing book, has delivered stellar results for the past decade. His theory has been discussed in numerous articles like this. A mutual fund, PRPFX, was constructed and named after his theory.

The following are the original portfolio's components:

  • 25% in U.S. stocks, to provide a strong return during times of prosperity. For this portion of the portfolio, Browne recommends a basic S&P 500 index fund such as VFINX.
  • 25% in long-term U.S. Treasury bonds for deflation protection.
  • 25% in cash in order to hedge against periods of “tight money” or recession. In this case, “cash” means a money-market fund.
  • 25% in precious metals (gold, specifically) in order to provide protection during periods of inflation.

The permanent portfolio mutual fund (PRPFX), managed by Michael J. Cuggino, was born out of this. As one of our readers pointed out, the fund was mismanaged in the early 1990s. Since Cuggino took over, he has stuck to Browne's principles and the results have been consistent and more than satisfactory. In this article, we construct an ETF version of the mutual fund and compare this with PRPFX, as well as with the popular version of the above Harry Browne Permanent Portfolio.

We derive PRPFX's allocation and build Permanent Portfolio ETF Version based on this recent report.

Portfolio Structure

  • Gold 20% (NYSEARCA:GLD)
  • Silver 5% (NYSEARCA:SLV)
  • Swiss Franc Assets 10% (NYSEARCA:FXF)
  • U.S. and Foreign Real Estate and Natural Resource Stocks 15% (5% IYR, 10% IGE, based on report)
  • Aggressive Growth Stocks 15% (NYSEARCA:VTI)
  • U.S. Treasury Bills, Bonds and Other Dollar Assets 35% (5% LQD, 15% TLT, 15% SHY)

The following table compares performance among several portfolios:

Portfolio Performance Comparison
Portfolio/Fund Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
PRPFX 22% 260% 9% 64% 10% 71%
Permanent Portfolio ETF Plan Strategic Asset Allocation Risk Profile 35 35% 251% 11% 56% 11% 58%
Permanent Portfolio ETF Version 23% 279% 9% 74%
Harry Browne Permanent Portfolio 11% 191% 7% 84% 8% 82%

We also compare this with a strategic asset allocation based portfolio, Permanent Portfolio Fund PRPFX ETF Plan Strategic Asset Allocation Risk Profile 35. This portfolio does monthly rebalances within the four major asset classes: US Equities (VTI, IGE), Commodities (GLD, SLV), REITs ((NYSEARCA:IYR)), Fixed Income (LQD, TLT, SHY).

It is clear that Permanent Portfolio Fund PRPFX ETF Version matches PRPFX very well. In fact, we can further see this from the following chart:

[Click to enlarge]

Using ETFs to construct a portfolio of your own has several advantages, such as flexibility (liquidity), tax-efficiency and other purposes (ex. hedging using option cover calls and tactically avoiding risk during market stress). In the coming decades that are expected to have deflation/inflation economic cycles, dollar/currency fluctuation and energy crisis, investors can definitely find values in studying such a portfolio.

Disclosure: I am long GLD, SLV, IYR, TLT.