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Can a Single ETF Make an Entire Portfolio?

Stocks in this article: GAL AGG GWL

NEW YORK ( TheStreet) -- The Wall Street Journal recently published an article that explored the possibility of constructing an investment portfolio using only three funds: one broad-based domestic equity fund; one broad-based foreign-equity fund; and one broad-based domestic fixed-income fund. Once the funds have been purchased, the only work to do is to rebalance as needed.

A portfolio of just three funds sounds very easy to manage but not as easy as a portfolio of just one fund, and there are ETFs that own all the asset classes.

These can be a solution for investors who no longer want to make decisions about asset allocation but realize they need a positive return on their assets to keep up with or be slightly ahead of inflation.

This is where so-called asset allocation funds can play a role. These funds own both equities and fixed income. There are several of them in the market, including the SPDR SSgA Global Allocation Fund (GAL).

GAL is a fund of 25 other SPDR funds. On the equity side, it allocates 34% to foreign equity, including emerging markets; 27% to domestic equity; and 4% to REITs. On the fixed-income side, GAL allocates 15% to domestic investment-grade debt, 7% to domestic high-yield, 5% to foreign and domestic TIPS and 3% to foreign fixed-income.

Since its debut in April, 2012 GAL has experienced relatively little volatility on its way to a 7% gain. Not surprisingly, that return falls right in between the 20% gain for the S&P 500 and the almost 3% decline for the iShares Core Total US Bond Market ETF (AGG). It is worth noting that during last month's Bernanke induced panic, GAL fell 7% -- more than the declines for the S&P 500 and AGG. This was because of GAL's foreign exposure.

The SPDR S&P Word ex-US ETF (GWL), which makes up 19% of GAL, fell more than 10% last month but has since recovered more than half of that drop.

One potential source of ongoing performance drag could be the roughly 9% allocation to Japanese equities via the 21% weighting to Japan in GWL, and GAL's 5% weighting in the SPDR Russell Nomura Prime Japan Fund (JPP). Japan obviously has many problems including a debt to GDP load greater than 200% and a relatively old population averaging 44 years not mention a stock market that is still down more than 60% from the all-time high set in 1989.

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