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3 'Tweaks' to Fortify Your ETF Portfolio

NEW YORK (ETF Expert) -- Extraordinary rallies off bear market bottoms are typical. Bullish run-ups in March 2003 and March 2009 registered enviable unrealized gains of 35% and 65% respectively; each advance experienced little resistance for roughly nine to 10 months.

Powerful moves off minor corrections are less typical, if not downright suspicious. Since mid-November, investors in the S&P 500 SPDR Trust (SPY) have witnessed a soothing 22% ride to all-time highs.

In the last quarter century, you could probably count the number of times on your hand when U.S. stocks traveled a similar vertical trajectory for more than a half year without a significant hitch or pullback.

Regardless of whether current valuations are reasonable, there are plenty of reasons to doubt the slope of the movement. For example, equities have outshined comparable bonds by nearly 7% over the last four weeks -- a feat that is particularly flashy for the previous two years. Similarly, several high-yield bond (a.k.a. "junk") indices show a modest 2.6% in additional yield over comparable Treasury-bond funds; the spread is more reasonable when it is greater than 3% (300 basis points).

It follows that sensible ETF enthusiasts might consider "tweaking" their holdings. Here are three moves that would lower portfolio risk, yet maintain a desirable level of reward for that risk:

1. Lower the Average Maturity of Your High-Yield Bond ETF. Both iShares High Yield Corporate (HYG) as well as SPDR High Yield Bond (JNK) have been terrific in the modern era of quantitative easing; both of these vehicles hold corporate bonds with average maturities in the sweet spot of the Federal Reserve's bond-buying program (i.e., seven years).

On the other hand, the Fed is beginning to hedge its public statements such that ... perhaps the central bank will begin to taper the money printing and subsequent bond purchasing. Although I don't believe that this will actually be the case in 2013, it is certainly possible. And if the Fed does begin to taper, one should expect intermediate- and longer-term Treasury yields to rise, pressuring comparable high-yield corporate bonds.

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