Creating a portfolio within a portfolio might be an interesting idea that can be implemented by investors. In this article, I would like to discuss the creation of a long-term portfolio of ETF’s. The primary objective would be to generate returns over the long-term, which would beat the index by a comfortable margin. Since there are several commodities and markets, where taking direct exposure might not be so easy or a feasible idea, creating such a portfolio might make up for this constraint.
Some of the basic assumptions I have taken while creating the portfolio of ETF’s includes –China, India, rest of Asia and the African Continent would continue to experience strong economic growth over the next decade and further. United States and Europe would see muted growth in the next decade with bouts of upswing and downturn in the economy.
An era of easy monetary policies would continue with interest rates remaining artificially low. Further, even if nominal interest rates go up, real interest rates would remain zero or negative. Dollar would continue to trend down over the long-term in line with easy monetary policy expectations and continued government support for the economy through quantitative easing. Further, other currencies such as the Euro might also continue to exhibit weakness. With this expectation for economies and currencies in the long-term, my ETF portfolio would broadly focus in the following themes –
1) Equities in emerging markets
2) Industrial commodities and oil
3) Agricultural commodities
4) Other natural resources
5) Currencies of some emerging markets
One might argue that the portfolio consists of highly cyclical themes and relatively risky assets in emerging markets.
However, the key point to be kept in mind is the investment horizon and the expected long-term trend for the investment themes. In my opinion, all the above mentioned investment themes are in a long-term bull market. This encourages me to ignore short-term fluctuations and create a portfolio including these themes.
Listed below are the specific commodities, other natural resources and emerging market ETF’s, which I would consider including in my long-term portfolio
1) United States Oil Fund (USO) – This ETF reflects the performance of (less expense) for the spot price of West Texas Intermediate (WTI) light, sweet crude oil. This would form a part of my portfolio considering the long-term fundamentals for crude as explained in one of my earlier writings
2) United States Natural Gas Fund (UNG) – This ETF reflects the performance (less expense) of natural gas. Very much like oil, natural gas also has superb long-term fundamentals (also discussed in one of my earlier articles)
3) iPath Dow Jones UBS Copper Tota (JJC) – Moving on to industrial commodities, this ETF would give me exposure to copper high grade future contracts traded on the New York Commodity Exchange. Copper also has robust long-term fundamentals as discussed in another of my articles
4) PowerShare Global Coal Portfolio (PKOL) – Coal is another industrial commodity, which is expected to perform well backed by robust demand from emerging markets. PKOL offers exposure to globally traded securities of the largest and most liquid companies in the coal industry
5) PowerShares Global Water (PIO) – I had discussed in one of my earlier articles about water being the most valuable commodity in the future. This ETF gives exposure to securities of companies that generate at least 50% of their revenue from water industry. Therefore, the ETF is a good option for exposure to water as an investment theme
6) SPDR S&P Metals and Mining ETF (XME) – Besides considering exposure to specific industrial commodities (mentioned above), I would also consider having the broad metals and mining ETF exposure. XME gives such an option with the ETF investing in metals and mining sub-industry portion of the S&P total market index
7) iPath Dow Jones UBS Agriculture (JJA) – Moving to agricultural commodities, this ETF would give investors exposure to seven futures contracts: soybeans, corn, wheat, cotton, soybean oil, coffee and sugar. With global food inventory being lowest in decades, rising demand from emerging markets and unpredictable weather conditions (leading to drought), the long-term fundamentals for agricultural commodities remains strong
8) iShares MSCI Emerging Markets Index Fund (EEM) - This ETF can be a good option to consider exposure to emerging market equities. There is no doubt that emerging market equities will outperform developed market equities in the long-term. Therefore, being invested in emerging markets is important in order to boost returns
9) iShare Latin America 40 Index (ILF) – Another ETF, which looks promising and also provides geographical diversification, is the ILF ETF. The ETF currently has around 55% of its investment in Brazil. With investments in Mexico and Chile, the ETF looks promising for long-term
10) CurrencyShares Russian Ruble Trust ETF (XRU) – In terms of exposure to currencies, I personally like to XRU ETF, which gives me exposure to the Russian Ruble.The currency is relatively undervalued and gives good returns scope considering strong demand for natural resources
Broadly, these themes would constitute an ETF portfolio within a portfolio for me. In terms of percentage allocation, I would consider 40% exposure to industrial commodities, 30% to agricultural commodities and water and the remaining 30% to regional diversification and currency.
Further, I did not mention gold and other precious metals here as I would personally look to hold physical gold than gold ETFs.