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This article will be the fifth in a series of articles about simple portfolio allocations for different levels of risk tolerance. In this article, I will be constructing an aggressive growth 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 average volatility over the last 12 months. [Volatility data is from ETFreplay.com]

Portfolio Funds

Aggressive Growth

Symbol

Weight

Volatility

Vanguard Extended Market Index ETF

(VXF)

40%

13.90%

iShares MSCI EAFE Small Cap Index

(SCZ)

30%

16.80%

SPDR Gold Shares

(GLD)

15%

19.00%

iShares Barclays 20+ Year Treas Bond

(TLT)

15%

15.00%

Fund Selection Method

I selected the above funds by roughly following the overall allocation of stocks and bonds, in the corresponding allocation ETF, the iShares S&P Aggressive Allocation (AOA) ETF.

The fund allocated roughly 80% to equities, and 20% to Bonds. For the portfolio, I chose to go slightly more aggressive than AOA, by making the portfolio 70% Stocks, 15% Bonds and adding in a 15% allocation to Gold.

To find the best equity fund, I used to following guidelines using the TD Ameritrade ETF screener; the only difference from these criteria and the ones from my previous portfolio is that I excluded the dividend criteria, because the portfolio is aggressive growth, so it favors capital growth over dividend growth.

  1. Morningstar Category: Mid Cap Blend, Mid Cap Growth, Mid Cap Value.
  2. Total net assets: Greater than $1 Billion.
  3. 3 yr Market Return is greater than 0.
  4. ETF Type is Equities.
  5. Chose the fund with the Highest Standard Deviation.

Based on the above criteria, there were 11 ETFs that met this criteria for Mid Cap U.S. equities, so instead of using the fund with the lowest standard deviation, I used the one with the highest standard deviation, because this portfolio has an aggressive risk target. The fund that had the highest standard deviation was VXF, so I included it as the Mid Cap U.S. equity fund for the portfolio.

Based on the above criteria, SCZ was the only ETF that met this criteria for international Mid Cap equities, so I included SCZ in the portfolio.

The aggressive growth portfolio is the second portfolio that I included a third asset class besides stocks and bonds. I decided to keep GLD in the portfolio, but since the portfolio is aggressive, I decided to allocate 15% to GLD in this portfolio, which is up from 10% in the growth portfolio.

For the fixed income allocation of the portfolio, I decided to go a different direction from the previous selection method and use the same process as the equities fund selection. Using the above criteria except changing the ETF type to bonds, and using all categories of bonds, the screen found 24 bond ETFs that matched the criteria. So I decided to use to the bond ETF with the highest standard deviation for the smaller allocation to bonds in this portfolio. The fund that had the highest standard deviation was TLT, so I included it in the portfolio.

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

Correlations

[Data from ETFscreen.com]

AGG

GLD

SCZ

SPY

TLT

VXF

AGG

1

GLD

-0.07

1

SCZ

-0.51

0.49

1

SPY

-0.58

0.40

0.92

1

TLT

0.85

-0.18

-0.68

-0.76

1

VXF

-0.55

0.36

0.88

0.96

-0.70

1

Returns and Data

[Data from ETFreplay.com]

The following charts and data show the portfolio compared to the iShares S&P Aggressive Allocation ETF.

(click to enlarge)

(click to enlarge)

Portfolio Challenges

The biggest challenge of this portfolio is being able to handle the volatility. Because 70% of the portfolio is Mid and Small Cap funds, the volatility will be much greater than the previous portfolios I have constructed, which have Large Cap stocks for the equity exposure. Another challenge is that TLT will probably have a some challenges going higher if interest rates are rising, but the loss in price of the bonds held by TLT will be partially offset by higher interest rates, so the yield on TLT should rise some if rates rise.

Closing thoughts

The returns of the portfolio have outperformed AOA by a wide margin over the last 3 years. The portfolio accomplished the outperformance with about 18% less volatility than AOA, but was expected, because AOA has 80% equities, and the above portfolio has 70% equities, so I expected the volatility of the portfolio to be lower.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer

Source: Simple Portfolio Building: Aggressive Growth