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This article will be the first in a series of articles about simple portfolio allocations for different levels of risk tolerance. In this article I will be constructing an Ultra Conservative portfolio of ETFs.

There are two goals I had for constructing the following portfolio:

  1. Make sure the portfolio is diversified as measured by correlations.
  2. Reduce the volatility of the portfolio by weighting the least volatile funds higher than more volatile funds. I used the 3 month volatility average over the last 12 months. [Volatility data is from ETFreplay.com]

Portfolio Funds

Ultra Conservative

Symbol

Weight

Volatility

SPDR Barclays Capital 1-3 Month T-Bill

(NYSEARCA:BIL)

40%

0.20%

PowerShares VRDO Tax-Free Weekly

(NYSEARCA:PVI)

40%

0.60%

PIMCO Enhanced Short Maturity Strategy ETF

(NYSEARCA:MINT)

20%

0.70%

Below is a table showing the correlation of each fund to each other as well as each fund the iShares Barclays Aggregate Bond (NYSEARCA:AGG) and the SPDR S&P 500 (NYSEARCA:SPY).

Correlations

[Data from ETFscreen.com]

AGG

BIL

MINT

PVI

SPY

AGG

1

BIL

0.14

1

MINT

0.12

0.12

1

PVI

0.01

0.01

0.22

1

SPY

-0.58

-0.2

0.16

-0.04

1

Returns and Data

[Data from ETFreplay.com]

click to enlarge

Closing thoughts

The funds chosen are all short term bond funds with low correlations to each other and AGG, and SPY. The returns are less than that of a broad bond fund like AGG, but for someone that wants a portfolio of basically "Cash" funds that is to be expected.

Disclaimer

Source: Simple Portfolio Building: Ultra Conservative Fixed Income