Calm Your Selloff Fears With These Five ETFs
Start with the assumption that an equity portfolio for a U.S.-based investor is 75% domestic (in Spyders (SPY)) and 25% foreign (in iShares MSCI EAFE (EFA)). To reduce volatility and correlation but still capture most of a big move up, let's cut the Spyders weight to 50% and reallocate that 25% of the capital in 5% increments to:
- Calamos Convertible Opportunities and Income Fund (CHI): A convertible bond fund that yields 9%. Convertibles tend to be less sensitive to interest rates because the bonds can convert into common stock.
- PowerShares DB Currency Harvest Fund (DBV): Goes long the three highest-yielding currencies in the Group of 10 and short the three lowest-yielding currencies in a carry trade of sorts, as I've written.
- CurrencyShares British Pound Sterling Trust (FXB): This very small fund (averages just under 7,000 shares daily and a market cap that doesn't quite make $60 million) simply owns British pounds and goes up when the pound goes up against the U.S. dollar (and down in the reverse case).
- Alpine Global Dynamic Dividend Fund (AGD): A closed-end fund that makes use of the dividend-capture strategy.
- BlackRock Enhanced Equity Yield Fund (EEF): A call-writing closed-end fund that appears to be a little less volatile than other funds that use the same general strategy.
Before I deconstruct this mix, note the most important thing about these five products: All rely on different strategies to achieve their respective results.
An important element of diversification is not being overly exposed (that is, too vulnerable) to one type of trade going bad. For example, EEF is a call-writing closed-end fund. I am a huge fan of the concept, but in practice don't allocate even 5% to the theme. Or if something bad were to happen to the dividend-capture strategy that AGD is based on, there shouldn't be any lasting impact on the other products in our imagined portfolio -- and therefore the whole portfolio.
Low correlation to S&P
|Ticker||Beta||Correlation to SPX|
Good Stress Test
Most portfolio enhancements held up better than the portfolio's original mix during the first quarter
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|Source: Yahoo! Finance|
Please note that due to factors including low market capitalization and/or insufficient public float, we consider PowerShares DB Currency Harvest Fund, CurrencyShares British Pound Sterling Trust and BlackRock Enhanced Equity Yield Fund to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
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