7-ETF Portfolio For The Skeptical, Bearish Crowd

by: Gary Gordon

The Greek referendum notwithstanding, most economists and Federal Reserve members have taken note of modest economic improvements. And while the slow-growth, limited-job environ is far from ideal, it should be enough to foster the well-being of many ETF assets.

Not convinced? Erratic price swings have shaken the olive out of your martini glass? Then opt for a simpler portfolio with a reliable income stream and a smaller percentage of the price volatility.

For example, if you hold the S&P 500 SPDR Trust (NYSEARCA:SPY) for an entire calendar year, it should offer you about 2% in cash dividends. Aim for a higher annualized income… perhaps 3.5%-3.75%.

Second, accept that you won’t be pursuing 9%-10% capital appreciation with an all-stock portoflio. Perhaps it’ll be half of that, where 4.5% “cap app” is reasonable.

Wrap it in a bow, and your calendar year return might be 8% (3.5% income + 4.5% “cap app”). For a defense-minded, “the world stinks” thinker, one should be thrilled with the possibility of an 8% annualized return.

So how can you achieve it? How can you get there with only 4/5 the risk of broad-based U.S. equity markets? Consider the following 7-ETF portfolio:

7-ETF Portfolio Delivers Admirable Results With Less Risk
Beta Yield Approx YOY %
Vanguard Utilities (NYSEARCA:VPU) 0.50 4.0% 14.3%
iShares FTSE NAREIT Residential (NYSEARCA:REZ) 0.95 3.7% 13.0%
iShares DJ Select Div Index (NYSEARCA:DVY) 0.95 3.8% 10.6%
Vanguard Int Corp Bond Index (NASDAQ:VCIT) 0.50 3.9% 5.7%
SPDR Barclays High Yield (NYSEARCA:JNK) 1.00 7.8% 3.1%
JP Morgan Alerian ETN (NYSEARCA:AMJ) 0.70 5.3% 4.6%
Dow Jones Diamonds Trust (NYSEARCA:DIA) 0.90 2.6% 7.3%
Average 0.79 4.4% 8.4%

From the get-go, let me acknowledge that I did not recommend this specific allocation 12 months earlier. Moreover, I do not believe in buying and holding assets through every bear market.

That said, I have often demonstrated the power of a lower-risk dual mandate — income stream and cap app. For instance, at the start of 2010, I served up a low risk 7-ETF portfolio for beating the S&P 500 and, in fact, the investment collection handily outperformed.

It follows that, while I may prefer greater activity in the management and diversification of the assets, I do believe that a low-beta, income-oriented portfolio like this one can accomplish investor goals. In particular, combining ETFs with lower beta risk than the S&P 500 market at large — all of which have yields greater than 10-year Treasury bonds – can produce an admirable return for the more pessimistic among us.

Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.