Debuting Our All-ETF Portfolio

by on May 25, 2011 | ETFs Mentioned:

The last few days have seen a number of interesting developments in financial markets, as commodities have seemingly resumed their skyward trajectory and Europe once again seems headed for a complete meltdown. Against this backdrop, we introduce the ETF Insider all-ETF portfolio, a hands-on portfolio that seeks to establish a small handful of tactical positions around a core of ETF holdings covering the major asset classes. First, however, we check in on the technical ETF trading ideas from Monday, updating performance through the first few days of the week.

Week To Date

Investors have been taken on a wild ride in the early part of this week, as disappointing economic data put stocks in an early hole on Monday morning. That early sell-off was triggered by a spike in Europe-related anxiety, as investors fled towards safe havens over worries that election results in Spain would make austerity campaigns more difficult and that issues in Italy would intensify in coming months. Activity was light on Tuesday, as many traders still remained on the sidelines given the ongoing concerns in Europe and a lack of meaningful data releases. With anxiety levels still elevated, safe havens continued to appreciate and gold made quite the run higher, charging past $1,525 an ounce. Another major development in commodity markets came in the energy space, where Goldman Sachs upgraded its price forecast for Brent oil to $120 / barrel from $105 previously.

Today, equities finally made a push higher, although investor sentiment was still mixed at best given the worse-than-expected durable goods orders and housing data. Orders for durable goods fell 3.6% in April given a steep decrease in demand for aircraft and autos. Housing prices also slipped lower and fell a seasonally adjusted 2.5% in the first quarter of 2011–though there was some good news. “Fortunately, serious delinquency rates also are declining,” said FHFA Acting Director Edward DeMarco. Precious metals continue to push higher, with gold surpassing the $1,530 an ounce level and silver trading well above $37 once again. Oil futures are also making a run higher, rising just past $101 a barrel, whileĀ  U.S. dollar weakness continues to be the longer-term theme as the dollar index has failed to gain any ground even amidst the recently shaky performance of equities.

Checking In: Technical Trading Ideas

This week our technical trading ideas focused on highlighting opportunities to establish short positions in the U.S. financial sector and mid-term Treasuries, along with a bullish outlook for copper based on key technical levels. The last few days have altered the outlook for some of these plays, prompting a reevaluation of our positions:

Technical Trading Idea #1: Short XLF

Financials tumbled to start the week thanks to broader risk aversion related to ongoing woes in Europe. That put our short call on XLF in good position, as this SPDR fell in Monday trading. The subsequent sessions saw continued weakness in financials, sending XLF closer to the 200 day moving average that we cited in our Monday analysis.

Since the start of the week, XLF has managed to hit our very near term target of $15.45 a share quite nicely, even declining as low as $15.39 Tuesday mid-day. We’re happy to take profits at our suggested price target, which yields a 0.6% gain in just two days of trading. If weakness persists in the financial sector, XLF will likely wander sideways and eventually take a dive lower towards $15 a share.


Technical Trading Idea #2: Short IEF

IEF opened higher on Monday morning above the suggested support level of $96; however, the fund quickly gave up its gains as equities found their footing and rose in afternoon trading. Treasuries continued to sink on Tuesday and IEF dipped as low as $95.64 a share, but failed to accelerate downwards as we had anticipated.

This pick has been flat and for that reason we recommend holding the short position on IEF until the fund manages to close above $96 a share. Any strength in the equity markets over the next few days could easily send this fund lower towards our target of $94.45 a share, but if anxiety continues to steer investors away from riskier assets, then U.S. Treasuries could continue their slow and steady rise.

Technical Trading Idea #3: Long JJC

JJC opened at $52.14 a share, which was far lower than anticipated given that the fund previously closed above $54 a share on Friday. Likewise, going long turned out to quite profitable as the fund has posted a gain of nearly 4% since Monday’s open. Copper prices appear to be building support at current levels which leads us to believe that JJC is worth holding given the attractive upside potential. Our price target for the next month remains at $60 a share; however, we advise more conservative traders to take some profits off the table and lock in gains at current prices above $54 a share.

ETF Insider Portfolio

The ETFdb Insider Portfolio is highlighted below, along with a discussion of each of the components and our rationale in the current environment. As discussed in more detail below, we’ll continue to be on the lookout for attractive opportunities to establish positions in asset classes that suffer a sell-off, maintaining a cash position in hopes that an opportunity to go “bargain shopping” arises:

Ticker ETF $ % Bought Sold Gain (Loss) Since Purchase
VTI Total Stock Market ETF $10,270 10.27% 5/25/2011 n/a n/a
VEA Europe Pacific ETF $10,038 10.04% 5/25/2011 n/a n/a
VWO Emerging Markets ETF $9,921 9.92% 5/25/2011 n/a n/a
AGG Total Bond Market Fund $10,174 10.17% 5/25/2011 n/a n/a
USCI United States Commodity Index Fund $10,030 10.03% 5/25/2011 n/a n/a
RWO Global Real Estate $9,842 9.84% 5/25/2011 n/a n/a
HYLD Peritus High Yield ETF $9,959 9.96% 5/25/2011 n/a n/a
YAO China All-Cap Equities $10,044 10.04% 5/25/2011 n/a n/a
JEM Barclays GEMS Index ETN $4,890 4.89% 5/25/2011 n/a n/a
FOL Oil Bull/S&P500 Bear Spread ETF $5,000 5.0% 5/25/2011 n/a n/a
Cash $9,832 9.83% n/a n/a n/a
Total $100,000

Analyst Insight

Below, we provide any insights we have on each component of the ETF Insider portfolio, including core holdings and shorter-term tactical plays:

Total Stock Market ETF (VTI): This fund is a core holding of our ETF Insider portfolio, delivering broad-based exposure to U.S. equity markets. VTI makes up a relatively small portion of this portfolio, a reflection of our view that international markets, both developed and emerging, offer greater growth potential over the long run. This portfolio starts with a base weighting of approximately 10% for VTI, with the potential to be adjusted depending on shorter-term views on the health of the U.S. economy.

Europe Pacific ETF (VEA): This ETF is our preferred tool for accessing developed markets outside of the U.S., including those in Europe and Asia. Despite the recent struggles, we believe that this asset class maintains potential for some meaningful appreciation in the short term, especially if the troubled PIIGS economies show any sign of strength.

Emerging Markets ETF (VWO): International exposure is necessary for any well-rounded portfolio, and we have selected VWO as one of our core holdings because emerging market exposure is especially attractive given the profit potential and recent outperformance of this asset class versus developed market equities. Though emerging markets have struggled so far in 2011, we believe a core holding in this asset class is necessary, and utilize some of out satellite positions to expand exposure to more promising corners of the emerging world (more on this below).

Total Bond Market Fund (AGG): This ETF serves as our core fixed income holding, though we readily acknowledge some shortcomings with the exposure offered. AGG is heavy on Treasuries, an asset class that we don’t expect to perform exceptionally well in the medium-term. Moreover, the lack of international exposure prevents this fund from being truly balanced. As such, don’t expect to see our allocation to AGG rise any time soon, unless major turbulence sends us running for safe havens.

United States Commodity Index Fund (USCI): Commodities have proven to have a place in nearly every portfolio, and we have included USCI as one of our core holdingsĀ  since we believe it serves as an excellent diversifying agents given its low correlation to equity and bonds. While commodities often expose investors to significant volatility, the tremendous run-up in prices over the last year serves as an illustration of the potential benefits of this asset classes. While there are a number of commodity ETF options available, we prefer the methodology employed by USCI; the “contango killer” features make this fund the best long term ETF option for commodity exposure.

Global Real Estate ETF (RWO): Our core holdings wouldn’t be complete without real estate exposure as we believe this asset class can still offer valuable diversification benefits and ultimately help tame overall portfolio volatility. RWO is a useful tool for establishing diversified real estate exposure as the fund allocates half of its holdings to U.S. equities, while the other half is reserved for international exposure (exclusively developed markets).

Peritus High Yield ETF (HYLD): While we don’t consider HYLD to be a core holding, we believe this fund can make for an incredibly useful tactical instrument in rounding out fixed-income exposure thanks to the fund’s active management strategy. HYLD has a relatively short operating history, but its performance suggests that its experienced management team is capable of delivering alpha in the high-yield debt market relative to other passive fixed-income benchmarks. This fund is currently yielding over 7%, and has gained nearly 5% in 2011 alone. Though the alarm bells are beginning to sound in the junk bond space, we’re holding on to HYLD for the time being in hopes of squeezing out some additional yield.

China All-Cap Equities (YAO): This ETF is an appealing tactical play focusing on broad Chinese equity exposure across all market-cap levels. China has carved out its position as an economic superpower and while GDP growth may be slowing down, the country still possesses a tremendous amount of potential in virtually every sector of its domestic equity market. After a disappointing start to the year, we believe there is an attractive entry point in YAO, and favor this fund as a more balanced option compared to FXI.

Barclays GEMS Index ETN (JEM): Currency exposure is a tactical strategy, and we feel that JEM is an appealing instrument within this asset class, capable of delivering uncorrelated returns, and likewise improving our portfolio’s overall volatility. This ETN follows an index comprised of one month synthetic money market deposits in 15 emerging market currencies that are formed through three regional sub-indexes: Eastern Europe, Middle East and Africa, and Latin America and Asia.

Oil Bull/S&P 500 Bear Spread ETF (FOL): A new family of “spread” ETFs has broadened our horizon of available tactical instruments, and while spread trading is nothing revolutionary, these new funds easily allow investors to gain the benefits of placing a spread trade without having to simultaneously purchase two separate positions. We believe that FOL, which bets on oil outperforming large-cap U.S. equities, is the perfect tactical tool to employ heading into the summer, since historically the summer months have been favorable for rising energy prices. Given the leverage used in this fund, we’re keeping a careful eye on the energy market, and will have a relatively short leash.

Disclosure: No positions at time of writing.

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