Wirsbo

Dwindling Oil Supply and ETFs

Those considering long term investments in oil should evaluate royalty trusts such as BPT and COS as these vehicles are much more efficient in providing this exposure. Prices correlate almost directly to crude and pay dividends.

Game Over for U.S. Oil, Natural Gas ETFs?

Those interested in oil should consider royalty trusts BPT and COS. Price correlates to crude providing you with 100% of the gain. As they distribute dividends you do get some marginal downside insultation. COS dividends are paid in Canadian dollars so there is an FX exposure. With a declining US dollar this is an advantage.

Keeping Portfolios Simple

Richard, I agree this is a sound beta strategy. I'd like to get your thoughts on the allocation weighting technique suggested below. The aim is to double the portfolio's Sharpe ratio from about .36 to .76 providing a more return for less risk exposure.

First, formalize and broaden the asset classes to gain economic diversification and provide the option to reduce correlation between assets in the portfolio. Applying the simplexity principle, assets react to growth and inflation, either can be either rising or falling. Define 4 economic environments in these terms. Assign asset classes to 1 or more of the 4 buckets based when they historically out perform.

Secondly, define capital and risk allocation percentages to maximize Sharpe ratio within and across the buckets. Due to expansion of the global economy and a transfer of relative growth rate to the BRIIC countries, I believe EM assets are uncorrelated to their developed counterparts and need to be considered separate classes. Here is the grid based on historical risk (volatility) and rates of return:

1. Rising Growth - 31%
- Equities - 48%
- Nominal Bonds - 12%
- Commodities - 34%
- Emerging Market Bonds - 6%
2. Rising Inflation - 24%
- IL Bonds - 34%
- Commodities - 43%
- Real Estate - 9%
- Emerging Market Bonds - 14%
3. Growth / Falling - 19%
- Nominal Bonds - 57%
- IL Bonds - 43%
4. Inflation / Falling - 26%
- Equities - 58%
- Nominal Bonds - 42%
Finally, select instruments that provide the desired exposure. I like the ETF approach you suggest due to low fees and liquidity. For a beta strategy, the low fees are especially important.

Thank you for sharing this and other thought provoking articles.