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Using an ETF Portfolio to Mimic an Endowment Portfolio

NEW YORK ( TheStreet) -- The California Public Employees' Retirement System, commonly known as CalPERS, recently posted investment results for its year ended June 30. CalPERS reported a 1.0% return for the year, which lagged the benchmark's 1.7% return.

You may not want to emulate that performance, but CalPERS uses what is generically referred to an endowment-style allocation that targets nine asset classes, some of which performed better. The continued issuance of specialized ETFs makes it easier to mimic these types of investment pools.

Public Equities and Private Equity

The first category in the report is labeled "public equities," and it shows a loss of 7.2% for the year. That might seem surprisingly low, but the iShares MSCI World Index Fund (ACWI) was down 8.8%.

Foreign markets have been lagging U.S. markets for a year and a half, so logically any portfolio that includes foreign stocks is likely to have lagged a domestic-only portfolio in that time. This is probably the easiest asset class to mimic. Any sort of equity portfolio is by definition public equities.

Private equity showed a return of 5.4% for CalPERS last year. There are so called private equity ETFs like the PowerShares Global Listed Private Equity Portfolio (PSP). The structural drawback to this fund is that it includes companies that are not pools of invested capital but are companies that manage pools of capital. As such, those stocks benefit from operating private-equity funds, not the holdings within private equity funds.

A possible substitute to consider is the UBS E-TRACS Wells Fargo Business Development ETN (BDCS). This is an exchange-traded note, so it is an unsecured debt obligation of UBS. If UBS were to somehow go under then this fund would be wiped out.

Candidly, this has never been an easy space to replicate with exchange-traded products. For the trailing 12 months, PSP is down 17% and BDCS is down 1%. The return histories have been especially unpredictable and volatile, thus it's not a space I would want to own.

Fixed Income and Real Estate

CalPERS did very well with fixed income with a 12.7% return. Of course, during the same time Treasuries did very well, and it seems likely that CalPERS correctly positioned to benefit from the flight to safety. Fixed income is easy to capture with broad index funds like the iShares Barclays Aggregate Bond (AGG). There are also plenty of specialized bond funds targeting corporate, high-yield and foreign segments of the bond market for anyone looking to try to outperform a broad index like AGG.
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ACWI $56.81 0.00%
AGG $110.89 0.00%
CUT $23.48 0.00%
ICF $100.07 0.00%
PSP $10.39 0.00%


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