McCall’s Call: Double-Dip Portfolio Review

October 05, 2011

 

Fixed-Income Options

The Vanguard Intermediate-Term Bond ETF (NYSEArca: BIV) rallied to a new all-time high in September as stocks were breaking down. During the market sell-off, the ETF was up 6.6 percent, a bit less than the 6.8 percent gain it achieved over the entire 13 months.

The ETF will clearly outperform in a down market and could suffer losses if stocks rally in the future. The current yield on BIV is 3.7 percent.

Municipal bonds have had an interesting 13 months, and the Market Vectors Municipal High Yield Bond ETF (NYSEArca: HYD) had its fair share of volatility.

The ETF finished the 13 months with a gain of 4.3 percent, but did even better, with a gain of 8 percent, during the sell-off. Because the monthly dividend is tax free, this ETF is best used in a taxable account. We own a position in HYD and feel with the current tax-free yield of 6.0 percent, it’s a no-brainer as a place to park some cash.

The iShares Barclays TIPS Bond ETF (NYSEArca: TIP) rallied to a new historic high in early August as money flowed into all government bond ETFs.

Not surprisingly, the ETF was up 5.5 percent during the market sell-off. But it was also up 10.6 percent during the entire 13-month span, making the ETF attractive as a hedging play in all market e

A low-volatility bond ETF is the PowerShares Emerging Markets Sovereign Debt ETF (NYSEArca: PCY). The returns for both the sell-off and the longer-term 13-month period were identical, at 0.2 percent.

The late 2010 sell-off was canceled by a rally from the February low—and a dividend yield of 5.4 percent. In the end, the ETF is a good way to gain exposure to bonds that are likely to perform better than those from developed countries like the United States.

Gold And Oil

The SPDR Gold ETF (NYSEArca: GLD) has been the ultimate safety play in the past decade as the dollar has steadily lost value to a host of currencies.

However, in the past month, the precious metal has been selling off heavily as the dollar rose and gold owners took profits. Still, over the 13 months since I unveiled my double-dip portfolio, GLD was the biggest winner.

It has risen 29.9 percent in that period and, even with the recent swoon, it rose 3.7 percent during the sell-off period. So, even after the pullback I continue to like GLD, and it remains my firm’s largest holding.

As long as we’re talking about commodities, let’s talk about oil. When the global economy slows and stocks fall, oil typically falls too.

This is why the United States Short Oil ETF (NYSEArca: DNO) was able to gain 37.7 percent during the market sell-off. DNO didn’t fair as well over the 13-month span, as it fell 5.2 percent. At this time I wouldn’t own DNO, as NYMEX oil is back near support in the low-to-mid $70s, and a move higher is likely into the end of the year.

VIX Might Not Be Worth The Vexation

If the goal is to add a volatile ETF to the portfolio, then why not invest in volatility? The iPath S&P 500 VIX Mid-Term Futures ETF (NYSEArca: VXZ) will increase in volume as the VIX futures on the CBOE rise.

This typically occurs as fear increases and stocks are selling off sharply. During the market sell-off, the ETF was up 42.7 percent, but that wasn’t enough to put it into positive territory for the entire 13-month time frame, during which it lost 19.1 percent.

This ETF is a very aggressive choice. It’s portfolio insurance where premiums are often lost, and is thus too aggressive for the majority of investors. So, please, think twice before playing with the VIX-related ETFs.

All Systems Go

If I were to build a double-dip portfolio today, I see no reason to change the current allocation.

However, after a big move down in the market, the odds of stocks going much lower are not as high, as much of the potential bad news is baked into prices.

On the other hand, even if stocks do rebound, the odds of this portfolio taking a big hit is low, as evidenced by the action during the 13-month span. As always, please do your due diligence before considering any of the ETFs above.


Matthew D. McCall is editor of The ETF Bulletin and president of Penn Financial Group LLC, a New York-based wealth management firm specializing in investment strategies using ETFs.

 

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