iShares Barclays TIPS Bond ETF (NYSEArca: TIP) is composed of a basket of Treasury inflation protected securities (TIPS). In the event of inflation, TIPS will help protect the current yield from deterioration caused by inflation. Inflation is not a concern during a double-dip recession, but I feel it will be an issue sooner rather than later, and that’s why I chose TIP over a comparable bond ETF. The 12-month yield is currently 3.1 percent.
iPath S&P 500 VIX Mid-Term Futures ETN (NYSEArca: VXZ) offers investors exposure to market volatility through futures contracts on the CBOE Volatility Index (VIX). Because the VIX typically rises with investors’ fears, VXZ can directly protect a portfolio from any sudden drops in the stock market. However, investors must realize there will be volatility in this position from day to day.
PowerShares Emerging Market Sovereign Debt ETF (NYSEArca: PCY) gives the DDP Portfolio exposure to bonds issued by emerging market countries such as
To give investors an idea how the double-dip portfolio has performed in the past, I backtested it and the results are interesting. Year-to-date (through Aug. 30) my “DDP” is up a cumulative 11.3 percent including dividend payouts. The biggest gainer was DRR, the double-short euro ETN, which rose 23 percent. The worst performer was SH, the inverse S&P 500 ETF. It rose 1.5 percent. During the same time frame, the S&P 500 has fallen 6 percent. The positive result for the DDP is not a big surprise; however, the large outperformance was a little shocking.
In 2009 the S&P 500 gained 23.5 percent and there’s no doubt most would assume the DDP took a big hit and lagged the market. The DDP did lag the market; however, the loss was not as bad as I had anticipated; losing just 1.6 percent last year. Helping the DDP avoid taking a major hit and remain near breakeven was the performance of PCY (up 27 percent) and GLD (up 24 percent).
From the beginning of 2009 through Aug. 30 of this year, the S&P 500 has gained 16 percent and the DDP is up about 10 percent; again lagging the overall market, but with what most would consider much less risk.
The real test is how did the DDP perform during the Oct. 9, 2007 to March 9, 2009 time frame when the S&P 500 fell 56 percent? Unfortunately only half of the ETFs in the DDP were created when the bear market began. However, of the five that were available to investors, here are their returns: +92 percent, +24 percent, +18 percent, breakeven, -4 percent. Even with half the numbers, it’s clear the DDP not only would have beaten the S&P 500, but it likely gained in value.
Finally, for the investors interested in yields, the current portfolio is projected to yield approximately 1.8 percent in 2010. If yield is your goal, DDP is not the best strategy; however, I have written several articles on yield that can be found on IndexUniverse.com.
My views regarding a double-dip recession above make clear that I’m not a big believer in the scenario. That being said, I do build diversified portfolios and this includes investing in a number of the ETFs mentioned in this portfolio. At this time, my firm currently has exposure to the following ETFs discussed in this article: SH, FXY, BIV, GLD, HYD, TIP and PCY. The allocation to the ETFs varies per account and not all clients own all seven ETFs. Keep in mind at Penn Financial Group we build personalized portfolios and therefore the holdings vary from client to client.
Matthew D. McCall is editor of The ETF Bulletin and president of Penn Financial Group LLC, a Ridgewood, N.J.-based wealth management firm specializing in investment strategies using ETFs.