Getting Your ETF Portfolio to Perform
By Ron DeLegge, Editor
January 9, 2009
SAN DIEGO (ETFguide.com) – Corn syrup, carbonated water, food coloring, and sugar are among Coca-Cola’s famous ingredients. Even though getting your hands on these ingredients wouldn’t be much trouble, it wouldn’t do you much good. That’s because only Coke’s secret formula describes the exact quantity of each key ingredient. In other words, you can’t successfully duplicate a bottle of Coke without the right formula.
Similarly, if you’re going to build a successful investment portfolio, you need to use not just the correct ingredients but the right formula.
Exchange-traded funds (ETFs) that follow true market indexes are the right ingredients or products to construct your investment portfolio. They are tax friendly, transparent, they cover multiple major asset classes and they have rock bottom expenses. ETFs also happen to be quite flexible. They can be bought and held, leveraged with margin, hedged with options, or sold short.
A Winning Formula
What’s the difference between a successful ETF investor and a failure? Getting the right mix of funds is often the dividing line. In fact, this is one of the contributing factors to the success of ETFguide’s Ready-to-Go ETF Portfolios. For the second straight year, all six of our ETF portfolios beat the Standard & Poor’s 500. This doesn’t happen by chance, but through diligent planning, research and a disciplined approach. Is your ETF portfolio using the winning formula?
Here’s a quick glance at how some of our ETF portfolios have done.
Sector Savvy Portfolio
At the end of 2008, there were 213 industry sector ETFs, making it the single largest ETF category. Which of these funds offer the greatest opportunities? Which do you avoid? The Sector Savvy Portfolio sifts through the maze of sector funds and capitalizes on the best areas. Unlike many of Wall Street’s overpaid money managers we haven’t been tempted by financial (NYSEArca: XLF) or technology (NYSEArca: XLK) stocks. In 2008, this portfolio posted a modest decline of 10.66%.
Capital Defense Portfolio
At times your investment strategy should be offensive, other times it should be defensive. Playing the wrong strategy at the wrong time could cost you a bundle. Anybody that suffered outsized losses last year experienced this. The purpose of this portfolio is to invest in defensive index ETFs that offer protection against inflation, deflation and other lurking financial danger. Exposure to short term bonds (NYSEArca: SHV) and short ETFs (NYSEArca: SKF) are two defensive holdings that have paid off.
Contrarian Fox Portfolio
Some of the greatest investors of all-time like Sir John Templeton and Warren Buffett have made their fortune by being contrarian investors. Why can’t a similar investment strategy be applied to ETF investing? This portfolio focuses on asset classes that are out-of-favor or undervalued and are poised for a rebound. The SPDR Gold Trust (NYSEArca: GLD) has been one of our most consistent holdings over the past 52-weeks. The strategy behind this particular portfolio is highlighted in Chapter 10 of a new book called “ETFs for the Long Run” (2008 John Wiley) written by Lawrence Carrel.
Strategic Balance Portfolio
This is arguably our most boring ETF portfolio, but the strategy behind it works. The central goal is to maintain balanced exposure to all the major asset classes. With falling interest rates, our strategic position in bonds (NYSEArca: AGG) has been one of our best performers. Many ETF portfolios have one of two problems: They’re either over-diversified or under-diversified. Too much salt on your chicken salad isn’t appetizing and neither is no salt. In 2008, this portfolio declined 27.56%.
Rebalancing Your ETF Portfolio
There’s no rule book that says you must rebalance your ETF investments every quarter or every year. It’s entirely your call. If certain ETFs you own experience huge gains, rebalancing your portfolio back to its original target asset allocation is advisable. Likewise, if you’ve had huge losses, your ETF allocation may need more than a simple rebalance, but a major overhaul.
Beware of Trading
The recent failure of hedge funds that built good reputations based upon trading systems proves that trading, at best, is a dubious long-term strategy. The main problem with actively trading ETFs every single day is the high transaction costs and mis-timing the buys or sells. The one trading strategy is superior to another is a myth. Based upon our successful track record, owning ETFs is the right strategy, not trading in and out of them. You too can enjoy the same success.
Because each of our ETF portfolios follows a specific pre-determined investment strategy, we are able to own the correct ETFs that best fit that particular game plan. And for the record, a 100% cash portfolio is not a game plan. If you’re dumb enough to celebrate over today’s low yields, immediately seek professional help – the mental kind.
While 2008 was a difficult year for stocks, we avoided the catastrophic losses that many hedge funds and stock pickers suffered. Our ETF portfolios are proof that beating the market, while difficult, can be done with the right ETF strategy. Which ETFs are we buying? Which are we selling? And why? To find out, you’ll need to become a subscriber.
Short-Term: published on Oct. 21, 2008