Portfolio Review: Orol Using Inverse ETFs To Smooth Returns

May 22, 2008

 

Depending on the time horizon and risk tolerance of his clients, Orol will use anywhere from 1-2% of such inverse ETFs in a portfolio.

Orol says he's slowly moving away from ETFs that rely on market-cap-weighted indexes. "It used to be that ETFs were very plain vanilla. Now, there's almost any toppings that you want and you can mix them almost any way you want," he said.

His clients are increasingly being put into ETFs using more quantitative and alternative weighting methodologies these days, Orol observes.

"If you buy an ETF of the S&P 500, you're narrowing your choices into the quantities of the same stocks within the same indexes you can build a portfolio around," Orol said. "We like the flexibility that alternative types of ETFs like those offered by WisdomTree and PowerShares provide in implementing a more tactical strategy. These types of ETFs give us more tools to tailor asset allocation models around each client's particular situation."

One he's using now is the WisdomTree High-Yielding Equity ETF (NYSE: DHS). "We use this to complement and even as a substitute for an S&P 500 market-cap-weighted index fund," Orol said. "Since it's equal-weighted, DHS has many of the same names. But they'll come in different amounts, which allows us to be more creative with building individual portfolios."

Fine-tuning Foreign Markets

He's investing at least 15% of the firm's assets in foreign markets. That can go up to 35% in more growth-oriented portfolios. "Instead of using broader international equity ETFs, we prefer to pinpoint particular places where there appears to be the most opportunity overseas," Orol said.

One of the funds he's using is EWJ. "The Japanese economy is healthier than it has been in years. And they've got major companies well-positioned to expand across the globe," Orol said. "It's a well-established economy that can grow as emerging markets in Asia and China expand."

Another ETF he likes these days is iShares MSCI Hong Kong Index (NYSE: EWH). "It's part of China, but is a very westernized country," Orol said. "So they've got the capitalistic system in place. And since they're part of China, they're really able to tap into a rapidly growing mainland economy."

The firm is avoiding direct exposure to Europe. "We're getting our exposure to Europe through U.S. companies that are doing a lot of business over there," Orol said. "We're just seeing more growth opportunities in non-European markets at this point."

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