Conservative ETF Portfolio Update

| About: SPDR S&P (SPY)

Last summer, we detailed on Seeking Alpha how a global tactical asset allocation strategy based on relative strength and momentum in ETFs could achieve strong returns with low risk. In these previous articles, we presented the principles and the mechanics of this strategy that we call our conservative ETF Portfolio because it always keeps at least 50% in fixed-income and cash.

Since June 30, 2011, the portfolio (whose asset allocation is updated at the end of every month) returned +5.76% (as of this Friday at 11:30am) in just over 7 months. Although it is below its historic performance of around 15% CAGR, it still represents an annualized return of 10%, which is arguably an extremely positive result given the incredible market conditions we had since last June.

The Portfolio composition, updated on January 31, 2012 is currently the following:

  • Equity and quasi-equity (40%): U.S. Preferred Shares (NYSEARCA:PFF), U.S. REITs (NYSEARCA:VNQ), China (NYSEARCA:FXI) and Brazil (NYSEARCA:EWZ).
  • Commodities (10%): Base Metals (NYSEARCA:DBB)
  • Bonds (20%): Long Term U.S. Treasuries (NYSEARCA:TLT), Aggregate Bond market (NYSEARCA:AGG)
  • Cash (30%): SHY

In order to underline the flexibility of the strategy and how it adapts to market developments, here is what the portfolio looked like as of July 31, 2012, just before August's turmoil: 70% in fixed-income and cash (SHY, TLT, AGG, TIP, 20% in Commodities (NYSEARCA:GLD) and DBB) and 10% in a short SPY position (through the inverse ETF SH.

This kind of flexibility is paramount to protect your capital from potential devastating losses and from potential bad decisions based on investor's behavior in the face of steep losses. The simple graph below highlights the relative performance of the conservative ETF portfolio and SPY since June 30:

performance conservative ETF portfolio vs S&P500

Disclosure: I am long FXI, EWZ, VNQ, DBB.