You probably saw on CNBC that Bob Pisani asked Jim Lowell,
to construct a series of
dozen ETF portfolios
with each of the six targeting a different expectation like bull,
bear, sideways and so on. For what it's worth, I consider both Matt
and Tom to be blogging friends of mine.
The reason to look at the sideways portfolio is that it seems
almost like a continuation of
about permanent portfolios. The target weights are as follows:
First, a couple of bottom up observations. A few clients own PBP
and it is a tough hold for people who are not patient or who cannot
think in terms of the entire stock market cycle. I have a lot of
faith that over an entire cycle this will look like a very good
choice but anyone thinking in three, six or even 12 month
increments will be frustrated by this one.
About 1/3 of LDQ is in financial companies, the average maturity
is 12-years and the 30-day SEC yield is 4.58%. I think there is
something to be said for choosing a few individual corporates that
are AA or A rated--obviously, it would be prudent to assess the
debt load for yourself and get familiar with cash flow numbers and
not rely exclusively on the ratings.
The Carry Trade ETF was in the high $20s for a while and then
hit a big air pocket to the low $20s and has been creeping up to
the mid $20s for a while. One drawback here might be the tendency
to overly rely on the back test to the point of not looking under
the hood and being in touch with the dynamics of the various
The junk bond ETFs have, of course, done well in the rally but I
want no part of the space. This might just be my hangup but I do
not have faith that capital markets are all better which, if true,
looms as a threat to any space that could be construed as
aggressive yield chasing.
AMJ is an ETN and I am not a big fan of that wrapper when there
are alternatives. I imagine the ETN wrapper bypasses some of the
tax reporting issues with MLPs but if I wanted to go this heavy in
MLPs I would rather pick a couple of individual names.
Looking at the top ten holdings of PFF I see Ford (
) and then nine different issues from financial companies--of
course, it is mostly financial companies that issue preferreds. I
have two preferred stocks that are widely held by clients. I feel
more comfortable with individual issues in this space than a
For the convertible space a fund of some sort is going to be the
best way to access the space for most people but in an equity
market downturn, using 2008 as a proxy, I think the fund could get
smacked pretty hard. Of course, the portfolio is for people who
believe the market will be range bound.
From the top down, the focus is obviously on yield which, if you
know the market will be range bound, makes plenty of sense. The
fund is obviously lacking for foreign exposure - the currency
harvest product is billed more as an absolute return vehicle than a
proxy for foreign assets - and there doesn't appear to be any
counter strategy. I picked up the concept of counter strategies
from my brief time at Fisher Investments.
Basically a counter strategy could be thought of as something
you own so that if your baseline assumptions are wrong you have
something that can still go up. The assumption of the portfolio is
a sideways market but what if it goes up a lot or down a lot? In an
up market this will lag and depending on what would push the market
down this portfolio could get hit very hard.
Despite the criticisms I think there is a lot of utility here. I
think this type of mix could make for one tranche or bucket of a
properly diversified portfolio. The segments chosen make sense and
most of the risks isolated above would not be that bad in a normal
cyclical downturn. During the 2008 event many of them were crushed
beyond what many people would have thought was realistic. Anyone
who is concerned that the event is not over and that we will incur
a similar downturn or continuation might want to structure this
type of tranche with less reliance on funds and instead favor
individual issues for some of the fixed income components.
PICB: Another International Corporate Bond ETF