Last week, different tactical approaches (momentum, moving average) to the Permanent Portfolio were detailed here. Harry Browne proposed a "Permanent Portfolio" allocation in his 1998 Fail-Safe Investing: Lifelong Financial Security in 30 Minutes. The portfolio is an equal-weight portfolio of stocks, long-term bonds, cash, and gold. One approach to replicate the Permanent Portfolio is to hold stock, long-term bond, cash, and gold positions.
Another alternative is to hold a mutual fund or ETF that replicates the entire Permanent Portfolio strategy. Two "one-stop" options presently exist, the Permanent Portfolio Mutual Fund (MUTF:PRPFX) and the Global X Permanent ETF (NYSEARCA:PERM).
PRPFX invests 20% of its assets in gold, 5% of its assets in silver, 10% of its assets in Swiss franc assets, 15% of its assets in stocks of U.S. and foreign real estate and natural resource companies, 15% of its assets in aggressive growth stocks, and 35% of its assets in dollar assets. This allocation is similar to the one proposed by Browne, but does differ in its allocation weightings and its exposure to real estate, silver, natural resource companies, and the Swiss franc.
In February, Global X Funds launched the Permanent ETF (PERM). This ETF seeks to replicate, net of expenses, the Solactive Permanent Index. The index tracks the performance of four asset class categories that are designed to perform differently across different economic environments. They include stocks, U.S. Treasury bonds (long-term), U.S. Treasury bills and bonds (short-term), and gold and silver.
Since its inception in February, PERM has failed to gather significant assets, with total assets currently listed at less than $15 million. It also has thin volume, with average daily volume less than 15,000 shares and its current expense ratio is .49%. The thin volume makes trading more difficult than more widely held ETFs and could lead to larger bid-ask spreads.
In March I compared the early performance of PERM to an equal-weight portfolio of four ETFs: SPY (SPDR S&P 500 ETF), TLT (iShares Barclays 20+ Year Treasury), SHY (iShares Barclays 1-3 Year Treasury Bond Fund), and GLD (SPDR Gold Trust). Below is an update to the two portfolio's relative performance. Portfolio A is 100% invested in PERM while Portfolio B uses the four ETF allocation. Returns include dividends (PERM has yet to pay a dividend), data courtesy of ETF Replay:
Since its inception PERM has under-performed a 4 ETF strategy. The 4 ETF strategy has no exposure to silver, while PERM maintains exposure to silver. As you can see below, silver (using the ETF SLV as a proxy) has underperformed gold since February 7th (PERM's inception date). Data courtesy of Yahoo Finance:
Thus, part of the short-term underperformance of PERM could be related to its silver exposure. The performance difference between gold and silver will fluctuate in the long-term, and at times PERM's silver exposure could aid its performance.
The expense ratio of PERM is also worth considering when evaluating performance. The expense ratio of .49% compares to the SPY expense ratio of .09%, TLT expense ratio of .15%, GLD expense ratio of .40%, and SHY expense ratio of 15%. In an equal weight portfolio, these expense ratios average .20%. However, additional commissions could be generated when each ETF is bought or sold, while a single permanent allocation to PERM only creates one transaction.
PRPFX is another viable alternative for investors looking for a Permanent Portfolio strategy. However, as detailed above, this mutual fund's allocation strays further than the Harry Browne allocation. Its performance since February in relation to PERM:
PRPFX has an expense ratio of .84%, higher than its ETF counterpart. However, it may offer an alternative allocation preferred by some investors.
The three Permanent Portfolios detailed here all share similar strategies. However, as we can see, even small (or in the case of PRPFX, moderate) differences in allocations and expense ratios can lead to differences in performance over a relatively short time period. For the long-term investor, identifying these differences and then allocating accordingly will impact returns in the long run.