Building the Perfect ETF Portfolio (with 20/20 Hindsight)

by on July 9, 2014

One of the most frustrating aspects of investing is hindsight. The could have, should have, would have mentality has nagged every investor at some point or another. It can be easy to look back and think of what you should have invested in at the time, but it’s impossible to know future outcomes in the present. However, taking a look back at the performance of certain assets during certain market environments can be a useful exercise to help determine how you may want to allocate your resources in the future [for more ETF news and analysis subscribe to our free Daily ETF Roundup].

We created a hypothetical ETF portfolio that assumes investment on March 9th, 2009, the market bottom and beginning of a bull run that has yet to lose steam. We threw in a few caveats: no leveraged or inverse products, and the portfolio had to feature realistic allocations. This means that the portfolio will not feature a 100% allocation to biotech ETFs as no investor in their right mind would make such an investment.

The idea behind this portfolio is to demonstrate funds that perform in excess of their peers during bull runs, and others who have simply had a strong couple of years. Some of this can be used as a good learning exercise, but it is partly just for fun as well.

The Ultimate ETF Portolio

The following table breaks down the ETFs we chose for this portfolio and how they performed since the market bottom through the first half of 2014:

ETF Allocation Return
S&P 500 Pure Value ETF (RPV) 50% 569%
SPDR Barclays Capital High Yield Bond ETF (JNK) 20% 154%
iShares Retail Real Estate Capped ETF (RTL) 10% 405%
MSCI Thailand Capped ETF (THD) 10% 335%
United States Gasoline Fund LP (UGA) 5% 175%
Dynamic Pharmaceuticals (PJP) 5% 411%
Total Portfolio Return: 419%

As a whole, the portfolio would definitely err on the side of risky, but it is not too far-fetched for someone to make such allocations. Let’s take a quick look at the individual holdings:

Equity – RPV

Fulfilling the equity allocation for the portfolio, RPV easily beat out the ETF king SPY as it was one of the best performing funds since the bottom. This is a perfect example of how a fund’s weighting and methodology can make all the difference in investing. Investors should note that while RPV will outperform in bull years, the fund also loses more than average during bear periods as it surrendered nearly 50% in 2008.

RPVFixed Income – JNK

You would be hard pressed to find a number of fixed income products that had stellar performances over the last five years, as equities have taken the front seat for quite some time. Still, JNK provided a strong price appreciation on top of its handsome yield that currently sits at 4.6% [see also Bond ETFs In Focus: Defining All The Yield Metrics].

JNKReal Estate – RTL

This would have been a tough call to make, especially because the housing bubble was a feature catalyst in the Great Recession. Still, real estate exposure is common in portfolios, and few funds were able to match the returns that RTL offered over the years.

RTLEmerging Markets – THD

Though it did not used to be as common, emerging market exposure is now a popular growth option for a number of investors. Though a number of countries fared well since the market bottom, none were better than Thailand, allowing THD to produce stellar returns.

thdCommodity – UGA

Commodity exposure is still foreign to some investors. For this portfolio, we singled out gasoline and UGA, as this particular commodity outdid its peers along with broad benchmarks.

ugaBonus – PJP

We called this our bonus holding as there is wiggle room in every portfolio for investors to make a small allocation to a sector or security that they truly believe in. If you were one of the lucky ones who believed in the biotech and pharma space, you were graced with some handsome returns over the last five years.


The Bottom Line

Hindsight is always 20/20 with investing and it can be easy to think, “if only I would have bought that stock way back when.” In reality, you will never be able to achieve a perfect portfolio; that is just the nature of investing. But taking a look at certain securities and how they performed in certain markets can be a useful exercise when it comes time to make allocations for the future.

Follow me on Twitter @JaredCummans.

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Disclosure: No positions at time of writing.