ETF Update

Portfolio Insulated From a Bumpy Ride

Stock quotes in this article: PBP , DNH , IGF , JJA , NARFX , RYMFX , TIP , BWX  

PBP has pretty much behaved as hoped for. It's up a little, while the S&P 500 has gone down a little. DNH is meant to be a substitute for iShares MSCI EAFE Fund(EFA Quote), and although DNH has done about the same as EFA since the portfolio's inception, I still think DNH is the better hold because it has zero exposure to Japan compared to almost 20% for EFA. Also, DNH's very heavy (87%) exposure to Australia provides for a better zig zag effect with its 0.678 correlation to the S&P 500 vs. 0.825 for EFA.

The idea behind IGF is that no matter what is going on with the stock-market cycle, money must be spent on infrastructure. The flow of capital creates a tailwind that could allow for price appreciation even in a down market. While IGF has done better than the S&P 500, it has not done much better -- it's down a little.

JJA has delivered, not only with a 16% return, but also with a 0.02 correlation (according to PortfolioScience.com). (The chart looks like a negative correlation to me.)

Click here for larger image.

RYMFX, which is an absolute-return vehicle, has had a similar effect as JJA, with a lower return, 6%, and a negative correlation to SPX.

BWX has been up a little and TIP has been down a little, but each one has had a negative correlation over the period studied. Each is about where one would expect.

Going forward, I think this portfolio would continue to work. Agricultural commodities have generally been hot, but are slightly off their highs from early March. Greater awareness of food inflation may mean it's a fad, but a 5% weighting minimizes the consequences of poor timing.

The portfolio clearly has gaps (no emerging markets to speak of, no small-caps and no REITs, to name a few), but this can serve as a base upon which to build.

This portfolio was designed to be less volatile than the market. That hopefully continues to mean that it would go down less if the market keeps heading lower -- but will also mean it will go up less the next time the market is up a lot.

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At the time of publication, Nusbaum was long PBP, DNH, IGF, NARFX, RYMFX, BWX and TIP on behalf of clients and/or himself, although positions may change at any time.

Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback; click here to send him an email.

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