For the equity and corporate bond part of one's portfolio, it might be a good idea to have a portfolio (of ETFs) within a portfolio. The advantage of having such a portfolio is that investors will have exposure to a number of stocks in the investment theme that they are bullish on for long term.
This article looks into some interesting ETFs from Vanguard, which can be considered for the portfolio. I am of the opinion that these ETFs have the potential to outperform the markets in the long term. Therefore, these ETFs might serve as catalyst for boosting overall portfolio returns.
Energize The Portfolio
In an environment of massive global quantitative easing, it would be a good idea to consider exposure to any energy-related ETF. The impact of quantitative easing is clearly visible on crude prices, with Brent crude near six month highs at a time when the world has already entered into a manufacturing recession.
(click images to enlarge)
Further, in the long term, growth in India and China will be robust, leading to increasing demand for energy. China, with a population of 1.3 billion people, has a per capita crude consumption of 2.5 barrels and India, with a population of 1.2 billion people, has a per capita crude consumption of 1.0 barrels. The per capita crude consumption in OECD countries for 2011 was 13.5 barrels. As the per capita demand for crude grows in these two countries, energy prices will trend higher.
In line with this rationale and argument, I would consider exposure to the Vanguard Energy ETF (VDE). The ETF seeks to track the performance of a benchmark index that measures the investment return of stocks in the energy sector. With a low expense ratio of 0.19%, the ETF is a good investment option.
In terms of sub-sectors within the energy sector, the ETF has 42.5% exposure to the integrated oil & gas segment, a 25.6% exposure to the oil & gas exploration & production segment, and a 17.5% exposure to the oil & gas equipment & services segment.
Stabilizing The Portfolio
Non-cyclical stocks are an essential part of the long-term portfolio. This is especially true in the current scenario, where the global growth is expected to remain sluggish for the prolonged period. The decision to keep interest rates at near-zero levels until mid-2015 is an indication of the sluggish growth expected by policymakers over the next few years.
As the chart below shows, non-cyclical sectors have performed well in the current crisis compared to cyclical sectors. The cyclical sectors considered in the chart are oil and gas, basic materials, industrials and finance. The non-cyclical sectors included for data are consumer goods, consumer services, telecoms and utilities.
The objective simply would be to invest in necessity rather than investing in luxury or sectors that are relatively more sensitive to economic data.
There are two ETFs I would consider for investment in this category.
The Vanguard Consumer Staples ETF (VDC) - The ETF seeks to track the performance of a benchmark index that measures the investment return of stocks in the consumer staples sector. The ETF also has a low expense ratio of 0.19%, like the VDE.
In terms of sub sector exposure within the consumer staples sector, the ETF has 19% exposure to the household segment, an 18.1% exposure to soft drinks segment, a 16.6% exposure to the packaged foods & meats segment, and a 16.4% exposure to the tobacco segment.
The Vanguard Health Care ETF (VHT) - The ETF seeks to track the performance of a benchmark index that measures the investment return of stocks in the health care sector. I have been mentioning the expense ratio as it is comparatively lower compared to other ETFs. The ETF also has an expense ratio of 0.19%.
In terms of sub sector exposure within the healthcare sector, the ETF has 45% exposure to the pharmaceuticals segment, a 15.8% exposure to the biotechnology segment, a 14.7% exposure to the health care equipment segment, and a 7.5% exposure to managed health care.
Protecting The Portfolio
Government bonds would first come to mind when it comes to investing in risk free assets. With government debt to GDP surging for advanced economies, however, it might not be a great idea to consider long-term investment in government bonds.
I am of the opinion that quality corporate bonds are a better and safer long-term investment option than government bonds with artificially low yields (negative, when adjusted for inflation).
Further, the private sector has acted more rationally after the crisis compared to the government sector. Therefore, it is not surprising to see the private sector being the major economic growth driver post the crisis.
In line with this rationale, I would consider exposure to the Vanguard Long-Term Corporate Bond ETF (VCLT). The ETF invests in long-term investment grade corporate bonds. The ETF has an expense ratio of 0.14%, with total fund assets of USD1.2 billion as of August 2012.
Also, as of August 2012, the ETF had 1.2% exposure to Aaa rated bonds, 7.2% exposure to Aa rated bonds, 46.8% exposure to A rated bonds, and 44.8% exposure to Baa rated bonds.
In the current economic scenario, the best idea is to be diversified and the primary objective is to prevent capital erosion and generate returns, which are positive when adjusted for inflation. The ETFs discussed in the article look promising to deliver robust long-term returns for investors. I mention long term, as it might not be a great idea to trade amid continued volatility in asset markets. Over the long term, these ETFs should trend meaningfully higher.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.