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This article will be about creating a portfolio to capitalize on the major trend of rising demand for agriculture, energy, and materials brought on by growth in emerging market countries because of the rising populations, and growth of the middle class in emerging markets. For the portfolio I have a couple criteria/goals for the portfolio as listed below:

  1. Reduce the volatility of the portfolio by weighting the least volatile funds higher than more volatile funds. I used the 12 month average volatility over the last 36 months. [Volatility data is from ETFreplay.com]
  2. Include 5 ETF's that cover the following themes: Agriculture, Energy, Materials, Emerging Markets, and emerging market Bonds.
  3. For the agriculture, energy, and materials ETF chose a global ETF rather than a domestic one.
  4. Chose the first fund on the list that matches the category i.e. Agriculture, Energy or Naterials, since the funds are sorted by assets.

Reason's for selecting each category

Agriculture: The reason I chose to include agriculture ETF is that demand for food is growing world wide especially from emerging markets.

Energy: The reason I chose to include an energy ETF is because of rising middle class of emerging market countries. For example there is a large number of people in emerging markets who have never had a car are now driving and need fuel for all those cars. Another reason I included an energy ETF is because of the rising demand for agriculture, which will lead to rising demand for fuel to power farm machinery.

Materials: The reason I chose to include a materials ETF is because of the demand for products that emerging markets consumers are buying, as well as the need for materials to build new infrastructure as people move from rural areas into cities.

Emerging Markets: The reason I chose to include an Emerging Markets ETF in the portfolio is because the largest amount of growth of the previous three categories is coming from emerging market countries.

Emerging market bonds: The reason I chose to include an emerging markets bond ETF is because emerging markets have lower debt than the developed world and have a higher yield than most developed market bond funds. If there was a Emerging market TIPS bond fund that existed I would have chosen it for this spot but until the day that this fund fund in registration or one similar comes into existence than an emerging markets bond fund will be fine.

Fund Selection Process

For the process of finding the agriculture, energy, and materials ETF's that meet the above criteria I will be using the following list from ETFdb.com, the global equity ETF list, the emerging markets equity list, and the Emerging Markets bond list.

Agriculture ETF:

For the first ETF in the portfolio I looked at the global equity ETF list for the largest Agriculture related fund and found the Market Vectors Agribusiness ETF (MOO) was the largest, so I included it in the portfolio.

Energy ETF:

For this ETF I looked at the global equity ETF list for the largest Energy related fund and found the iShares S&P Global Energy (IXC) was the largest, so I included it in the portfolio.

Materials ETF:

For this ETF I looked at the global equity ETF list for the largest Energy related fund and found the iShares S&P Global Materials (MXI) was the largest, so I included it in the portfolio.

Emerging Markets ETF:

For this ETF I looked at the emerging markets equity ETF list for the largest fund and found the Vanguard MSCI Emerging Markets ETF (VWO) was the largest, so I included it in the portfolio.

Emerging Markets Bond ETF:

For this ETF I looked at the Emerging Markets Bond ETF list for the largest fund and found the JP Morgan Emerging Markets Bond Fund (EMB) was the largest, so I included it in the portfolio.

Portfolio

Description

Symbol

Weight

Volatility

iShares JPMorgan USD Emerg Markets Bond

EMB

30%

7.30%

iShares S&P Global Energy

IXC

25%

30.00%

Market Vectors Agribusiness ETF

MOO

20%

30.20%

Vanguard MSCI Emerging Markets ETF

VWO

15%

31.50%

iShares S&P Global Materials

MXI

10%

33.40%

Returns & Data

[Data from ETFreplay.com]

The following charts and data show the portfolio compared to the MSCI All Country World Index Fund (ACWI).


(Click to enlarge)


(Click to enlarge)

Correlations

EMB

IXC

MOO

MXI

VWO

EMB

1

IXC

0.57

1

MOO

0.49

0.91

1

MXI

0.54

0.92

0.95

1

VWO

0.54

0.89

0.93

0.95

1

Portfolio Challenges

The biggest challenge of this portfolio is the diversification as measured by the correlations is not as low as I would have hoped, but having included the emerging markets bond fund did help to diversify the portfolio by adding a second asset class rather than just stocks. So the equity allocation of the portfolio will on average move together in the same direction.

Closing Thoughts

Overall I was very pleased that the portfolio outperformed ACWI with a positive return compared to ACWI which had a negative return over the time of the data available. The portfolio accomplished the outperformance with less volatility than ACWI which can be attributed to the 30% allocation to the Emerging Markets bond ETF, as well as weighting the portfolio by volatility.

Disclaimer

Source: Global Growth ETF Portfolio