In this article I will be constructing a portfolio of ETFs using the theme "the necessities of life." For me, I consider the necessities of life to be food, water and consumer staple items like toothpaste, toilet paper, etc. So with those three things in mind (food, water, and consumer staples), I will build a portfolio of ETFs to capitalize on the fact they are necessities. I will be using the following flow chart that I created as my basis for selecting five categories of ETFs, which are going from the left to right of the flow chart below: water, agricultural commodities, agribusiness, food and beverages, and consumer staples.
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ETF Portfolio Selections
For each of the five ETFs I pick I will be using the ETFdb.com specific sector lists. Also, below is a description of each ETF from ETFdb.com.
Water ETF
Using the Water ETF category, I found four ETFs in the category. I chose the one with the most assets: the PowerShares Water Resources ETF (PHO), which I include in the portfolio.
ETF Description: The Index seeks to identify a group of companies that focus on the provision of potable water, the treatment of water, and the technology and services that are directly related to water consumption.
Agribusiness ETF
Using the Agribusiness ETF category, I found six ETFs in the category. I chose the one with the most assets, the Market Vectors Agribusiness ETF (MOO), and included it in the portfolio.
ETF Description: The Index provides exposure to publicly traded companies worldwide that derive at least 50% of their revenues from the business of agriculture.
Agricultural Commodities ETF
Using the Agricultural ETF category, I found 18 ETFs in the category. I chose the one with the most assets, PowerShares DB Agriculture (DBA), and included it in the portfolio.
ETF Description: The DBIQ Diversified Agriculture Index Excess Return is a rules-based index composed of futures contracts on some of the most liquid and widely traded agricultural commodities. The Index is intended to reflect the performance of the agricultural sector.
Food and Beverage ETF
Using the Food and Beverage ETF category, I found one ETF in the category -- PowerShares Dynamic Food And Beverage (PBJ) -- and included it in the portfolio.
ETF Description: The Index is comprised of stocks of U.S. food and beverage companies. The Index is designed to provide capital appreciation by thoroughly evaluating companies based on a variety of investment merit criteria, including fundamental growth, stock valuation, investment timeliness and risk factors.
Consumer Staples ETF
Using the Consumer Staples ETF category, I found 17 ETFs in the category. I chose the one with the most assets, Consumer Staples Select Sector SPDR (XLP), and included it in the portfolio.
ETF Description: The Consumer Staples Select Sector Index includes companies from the following industries: food and staples retailing; household products; food products; beverages; tobacco; and personal products.
Data and Charts
Below is a table with each ETF with symbol and description. Also, I will be weighting the ETF portfolio by volatility, so the fund with the least volatility has the greatest weight and so on. I will be using the three-month average volatility over the last 36 months for the data. For the volatility data I will be using the ETFreplay.com volatility tool, as well as the ETFreplay.com backtest tool for the data table and charts below. In the charts I will be comparing the ETF portfolio to the SPDR S&P 500 (SPY).
Symbol | Description | Weight | Volatility |
XLP | Consumer Staples Select Sector SPDR | 30% | 9.40% |
PBJ | PowerShares Dynamic Food & Beverage | 25% | 11.60% |
DBA | PowerShares DB Agriculture | 20% | 12.80% |
PHO | PowerShares Water Resources | 15% | 18.10% |
MOO | Market Vectors Agribusiness ETF | 10% | 20.10% |
Closing Thoughts
Overall, the portfolio performed very well against the SPY, having a positive return vs. a negative return for the SPY and doing so with less volatility than the SPY. The portfolio is heavily skewed toward agriculture-related industries, so there is a risk that when commodities have trouble the portfolio could see some challenges. In the long-term view, the global population will likely keep growing at or near its current pace, which will lead to increasing demand for food and water -- but at the same time decrease the land available for farming because of people buying houses, or cities expanding into farmlands to accommodate the increased population.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
