Mohamed El-Erian has quickly become an investment guru. El-Erian, the CEO of Pimco, the world's largest bond-fund manager, has interesting ideas about portfolio construction and the evolution of diversification. He devotes a large portion of his latest book, "When Markets Collide," to a new type of portfolio. I will now explore some simple choices that fit in with El-Erian's concept. Here's the breakdown:
For the domestic equity allocation, 10% goes to PowerShares S&P 500 Buy Write Portfolio ( PBP). The track record of the buy write index has been to outperform the S&P 500 over the entire stock-market cycle, only lagging when the market rallies, as it did in 2003. iShares S&P 600 Small Cap ETF ( IJR) would take the other 5% in domestic equities. In the early stage of a stock-market cycle, small-cap stocks tend to outperform large caps. IJR helps capture that effect. Many investors use iShares MSCI EAFE ETF ( EFA) for developed country equities, but it is heavy in Japan, at 25%, so I prefer 10% be allocated to WisdomTree International Large Cap Dividend ETF ( DOL), which only puts 9.7% in Japan. There is now a choice among foreign small caps. The SPDR S&P International Small Cap Index Fund ( GWX) is lighter in financials than similar funds and gets the other 5% in this category. In emerging markets, I use the PowerShares BLDRS Emerging Market 50 Index Fund ( ADRE). Interestingly, small-cap emerging markets ETFs don't do any better than large-caps. El-Erian likes private equity. Because no ETF can mimic that category adequately, I omitted it from the portfolio. El-Erian recently said this might be the most difficult part of the market for do-it-yourselfers to access. The ETF industry has been creating more fixed-income choices, which is a boon for investors. For domestic bonds, I would suggest 6% to iShares Barclays 1-3 Year Treasury Bond ETF ( SHY) and 3% to iShares Barclays Agency Fund ( AGZ). The yields are lousy (about 2% and 2.5%, respectively) but if yields rise, longer-dated bonds and bond funds will tumble. Anyone so inclined could buy individual fixed-income issues. The 15% target for foreign bonds could be easily captured with iShares S&P Citigroup International Treasury ( IGOV). SPDR has a similar product, but it has emerging market exposure, whereas IGOV does not.