The Permanent ETF: A Lesson in Diversification

NEW YORK (TheStreet) -- A couple of months ago Global X launched the Permanent ETF which is a play on the old Harry Browne concept of putting 25% equal portions into equities, longer term bond, Treasury bills or cash and gold. The big idea is that no matter what is going on in the world at least one of the four segments will be doing well.

The Permanent Portfolio Mutual Fund ( PRPFX) comes close to Browne's original idea and has an outstanding long-term track record that makes studying this worthwhile. PRPFX has an annualized 10-year return of 10.92% vs. 4.1% for the S&P 500 Index including dividends. In 2008 when the S&P 500 declined by 37% PRPFX only went down by 8%.

The Global X version is pretty true to the original but does take some liberties with the equity portion by including small exposures to REITs, natural resource stocks and foreign stocks as opposed to having the entire equity tranche in one broad index fund.

Along the lines of taking liberties with the equity allocation, perhaps other variations can be explored. The point here is not necessarily to mimic Browne's idea in other individual countries but to understand a little the diversification benefits from the portfolio and assess what can be taken from the strategy and applied to your own portfolio.

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Australia

Investors so inclined could build a permanent portfolio denominated in other currencies with ETFs. For example a permanent portfolio could be constructed with Australian assets. For equities, an investor could capture a large cap/small cap combo with the iShares MSCI Australia Index Fund ( EWA) which is heavily exposed to banks and the mega cap miners Rio Tinto ( RTP) and BHP Billiton and for small caps the Index IQ Australia Small Cap ETF ( KROO). KROO is more heavily weighted in materials stocks and consumer discretionary.

The currency is easily owned with the Rydex Currency Shares Australian Dollar Trust ( FXA) which has a trailing yield of 3.8%.

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Bond exposure is available in the WisdomTree Australia & New Zealand Debt Fund ( AUNZ). AUNZ was recently converted from a from a New Zealand currency fund and has an 80/20 split between Australian and New Zealand debt, but the maturity is much shorter than the long bond that Browne called for at just under four years and the fund is on track to yield just over 4%.

Gold is denominated in U.S. dollars so one of the regular gold ETFs could work. PERM uses the ETF Securities Gold Trust ( SGOL).

Canada

A similar portfolio can be constructed for Canada using the iShares MSCI Canada Index Fund ( EWC) and Index IQ Canada Small Cap ETF ( CNDA) for equities, the Rydex Currency Shares Canadian Dollar Trust ( FXC) for the currency and the PIMCO Canada Bond Index Fund ( CAD) although with an effective maturity of 13 years it is still shorter than the original Harry Browne idea.

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And again with gold denominated in U.S. dollars SGOL can work, as could the SPDR Gold Trust ( GLD).

ETFs would also allow for a permanent portfolio for Germany and China and as more specialized foreign bond ETFs continue to proliferate there will be other choices like this.

AUNZ, FXA client holdings

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