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I have experience designing balanced and diversified ETF portfolios and actively trade VIX futures ETPs and options.
  • The Ultimate Couch Potato ETF Portfolio 6 comments
    Mar 11, 2014 1:52 PM | about stocks: XIV, SVXY, VQT, PHDG, IVV, SPY, IAU, GLD, RWR, BND, AGG

    If you have ever searched the web for sample portfolios, you have surely seen a wide variety of options. Some might suggest an allocation to bonds and equities according to your risk tolerance. Others might suggest that you add real estate and gold to enhance diversification. The one thing all of these suggestions will most likely have in common is that they are all very traditional.

    Since the financial crisis of 2008, two new asset classes have emerged as the talk on the street: volatility and alternative strategies, both of which offer portfolios an opportunity to enhance diversification.

    But how does the average couch potato investor incorporate these new sophisticated products into their portfolios?

    I have designed the Ultimate Couch Potato ETF Portfolio, a simple way to have exposure to six asset classes with a portfolio consisting of an equal weight in six ETFs. Through these ETFs, your portfolio will have exposure to the following asset classes: bonds, equities, real estate, commodities, volatility, and alternative strategies. As a result, your portfolio will be both balanced and diversified. Be sure to rebalance each ETF annually to 16.67% of the portfolio.

    ETF #1 (BONDS): AGG - iShares Core Total U.S. Bond Market ETF - Holds 2200 bonds, including both treasury and corporate bonds. This ETF would normally account for 40% of a traditional balanced portfolio. It has a correlation coefficient to IVV (iShares Core S&P 500 ETF) of -0.24 (Source: Macroaxis Inc).

    (click to enlarge)

    ETF #2 (EQUITIES): IVV - iShares Core S&P 500 ETF - Holds 500 US large cap stocks. This ETF would normally account for 60% of a traditional balanced portfolio.

    (click to enlarge)

    ETF #3 (REAL ESTATE): RWR - SPDR Dow Jones REIT ETF - Holds 87 US REITs. Real Estate is the forgotten asset class. This ETF will compliment stocks with exposure to dividend paying real estate investment trusts. It has a correlation coefficient to IVV (iShares Core S&P 500 ETF) of 0.22 (Source: Macroaxis Inc).

    (click to enlarge)

    ETF #4 (COMMODITIES): IAU - iShares Gold Trust ETF - Holds 100% gold bullion. Gold is historically negatively correlated to stocks, and so adding gold to your portfolio will help to diversify your portfolio. IAU has a correlation coefficient to IVV (iShares Core S&P 500 ETF) of -0.44 (Source: Macroaxis Inc).

    (click to enlarge)

    ETF #5 (VOLATILITY): SVXY - ProShares S&P 500 VIX Short-term Futures Inverse Index ETF - Holds a rolling short position in the 1st and 2nd month VIX futures. Being short VIX futures will most often provide positive and generous gains, in both up and flat markets. However, in down markets, it will go down dramatically. But don't worry, you will be buying more at a great price and taking advantage of a great opportunity! This ETF has a correlation coefficient to IVV (iShares Core S&P 500 ETF) of 0.23 (Source: Macroaxis Inc).

    (click to enlarge)

    ETF #6 (ALTERNATIVE STRATEGIES): PHDG - PowerShares S&P 500 Downside Hedged Portfolio (S&P 500 Dynamic VEQTOR Index) ETF - Dynamically allocates to 500 US large cap stocks, cash, and a rolling long position in the 1st and 2nd month VIX futures according to the implied volatility of the S&P 500. This ETF will usually go up in both up and down years. It underperforms in up and flat markets, and outperforms in down markets. It will help to limit the downside in a down year without putting a drag on the portfolio in the long run. It has a correlation coefficient to IVV (iShares Core S&P 500 ETF) of 0.26 (Source: Macroaxis Inc).

    (click to enlarge)

    Now, let's take a look at how all six ETFs have performed over the last year. In the following chart, you can see diversification in action:

    (click to enlarge)

    The following chart and graph show the yearly performance of the Ultimate Couch Potato ETF Portfolio from 2006 to 2013. It assumes that a rebalancing occurs yearly at the close on December 31st.

    Source: SPDR Exchange Traded Funds, iShares, S&P Dow Jones Indices. *Index data is used.

    As you can see, the Ultimate Couch Potato ETF Portfolio significantly outperforms the S&P 500 (NYSEARCA:IVV). The portfolio works on the principle of continuously buying low and selling high. If an asset class underperforms one year, you will, through rebalancing, move money from outperforming asset classes to the underperforming asset class.

    Happy investing!

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

    Additional disclosure: I am long VXX calls and puts.

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Comments (6)
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  • bobswee
    , contributor
    Comments (12) | Send Message
    Have you back tested with quarterly re-balancing? Worth doing? Also, how about substituting ftgc for iau? Not as much history, but perhaps a more interesting commodities hedge. Thanks, Bob
    25 May 2014, 05:27 PM Reply Like
  • ctomso
    , contributor
    Comments (53) | Send Message
    Author’s reply » I tried quarterly rebalancing, but yearly seemed to work better. It also adds to the simplicity. As for FTGC, my portfolio avoids futures as a rule, with the exception of Volatility and Alternatives. However, in my personal (more complex) version of the portfolio, I invest equally in IAU, SLV, PALL, and PPLT (rather than just IAU) for the Commodities asset class.
    3 Jun 2014, 07:06 PM Reply Like
  • Vyacheslav
    , contributor
    Comment (1) | Send Message
    I read with interest your article.
    I plan to create a long-term investment portfolio (for more 3 years). The portfolio:
    SVXY (1 share. $89.10), RPV (2 shares. $108.62), IVV (1 share. $198.94), IOO (1 share. $79.15), IEFA (1 share. $61.75).
    Several times a year will buy more shares of the composition of the portfolio. Very interesting to hear your opinion. This portfolio profitable?))) Thanks.
    21 Jul 2014, 06:10 AM Reply Like
  • ctomso
    , contributor
    Comments (53) | Send Message
    Author’s reply » Yes, my portfolio is very profitable over time, as it is very well diversified. Your portfolio seems very high risk as you are only invested in two asset classes, both of which are positively correlated: equities and volatility. In a major market correction, you will get burned. If not following my example, you may want to at least allocate some money to bonds, gold, or PHDG, so you can reallocate and ride the market back up after equities/volatility get crushed.
    23 Aug 2014, 05:55 PM Reply Like
  • Robin Heiderscheit
    , contributor
    Comments (2145) | Send Message
    I like VQT plus ETB an Eaton Vance CEF that writes options on blue chips. The reason for the combination is that ETB outperforms in choppy markets and VQT does fine in one way markets, assuming the volatility hedge works.


    My sharpe is around 1.4 and in the recent 5% pullback my drawdown was .6%
    6 Sep 2014, 01:55 PM Reply Like
  • RM13
    , contributor
    Comments (912) | Send Message
    Ala Robin, why not look at PHDG/VQT with put write ETF like HVPW? I don't think you need other holdings to make this approach stand on its own 2 feet. After all, HVPW is better in generating income than other approaches due to picking volatile stocks - hence it takes away flat market short fall of PHDG.


    Average yearly yield of 5.5%. Protection in falling markets due to option and volatility. I will have to crunch the numbers sometimes, but this is damn good IMO.
    28 Nov 2014, 03:34 PM Reply Like
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