How to Build a Simple (But Effective) Safe Haven ETF Portfolio

The global economic slowdown has certainly changed the way investors now choose to allocate their assets. Many play a game of musical chairs, shifting exposure to sectors of the market that can provide them with more favorable returns. In periods of economic uncertainty, there are a number of “safe haven” asset classes that investors flock to when things get rocky. Most choose to limit their exposure to the risk-laden corners of the equities market, and instead focus on more stable industries, fixed income products, and even certain commodities.

Although many commodities exhibit extreme volatility, precious metals, particularly gold and silver, have always been an investor safe haven favorite. For those who wish to establish a tactical tilt towards asset classes that generally perform well during times of economic uncertainty, we outline an all ETF portfolio that is designed to maintain relatively low volatility during times of chaos and panic on Wall Street [for more commodity news and analysis subscribe to our free newsletter].

Portfolio Snapshot

First things first, here are the ETFs that we have chosen for this particular portfolio.

Ticker ETF Asset Type Allocation Expense Ratio
XLU Utilities Select Sector SPDR U.S. Equities 20% 0.20%
KXI iShares S&P Global Consumer Staples Sector Index Fund International Equities 20% 0.48%
IDV iShares Dow Jones EPAC Select Dividend International Equities 20% 0.50%
DBP PowerShares DB Precious Metals Fund Commodities 20% 0.75%
AGG iShares Barclays Aggregate Bond Fund Fixed Income 20% 0.22%
Weighted Average Expense Ratio 0.43%

As can be seen above, there is really one one fund that is directly related to the commodity industry, but allocations to precious metals are often times favorable during times of economic uncertainty.

Holdings Overview

Below is a brief overview of each component of this portfolio.

  • XLU: This ETF tracks the Utilities Select Sector Index, providing exposure to domestic utilities companies.
  • KXI: This fund gives investors broad-based exposure to the performance of the consumer staples sector of global equity markets.
  • IDV: This ETF tracks the Dow Jones EPAC Select Dividend Index, which measure the performance of companies that have provided relatively high dividend yields on a consistent basis over time.
  • DBP: This ETF provides investors with futures-based exposure to gold and silver prices [see also Three Reasons Why Gold Is Overvalued].
  • AGG: This fund tracks the Barclays Capital U.S. Aggregate Bond Index, which measures the performance of the U.S. investment grade bond market.

Historical Return Analysis

Ticker 2008 2009 2010 2011
XLU -29.2% 11.7% 5.4% 19.5%
KXI -22.6% 21.8% 13.2% 9.1%
IDV -52.0% 60.6% 11.9% -7.2%
DBP -3.0% 26.6% 37.6% 4.0%
AGG 7.6% 3.4% 6.4% 7.7%
Portfolio -19.8% 24.8% 14.9% 6.6%
Compare to SPY -36.7% 26.3% 15.0% 1.2%
Compare to AGG 7.6% 3.3% 6.4% 7.7%

The adjacent table provides historical results for each component of this portfolio, as well as backtested results (as available) for the entire portfolio during 2008, 2009, 2010, and 2011. The table also shows how this portfolio performed relative to a popular stock market benchmark (SPY) and bond benchmark (AGG).

Not surprisingly, this portfolio struggled in 2008 amidst a broad market recession. In 2009 and 2010, this portfolio reclaimed much of the ground lost during 2008. When comparing the difference in performance and volatility over the past three years, it’s fair to say that this portfolio does a fine job of serving as low-volatility alternative to broad-based equity funds, still capable of capturing tremendous gains during times of prosperity. During the market slump in 2008, this portfolio took a hard hit, although it still managed to outperform SPY by nearly double in terms of both performance and volatility. What’s even more appealing is that during the recovery in 2009 and 2010, this portfolio was able to match the returns of SPY, while doing so with roughly half the volatility.

Portfolio Expenses

Though this portfolio is not specifically designed for long-term use consistent with a “buy, hold, and rebalance” strategy, we still strive to minimize expenses incurred. To this end, we constructed a portfolio with a weighted-average expense ratio of just 43 basis points, which is significantly lower than fees charged by actively-managed mutual funds (we’ve assumed an expense ratio of 1.0%, which is probably a conservative estimate of the effective fees charged by an all-mutual fund portfolio). The impact of this reduced costs structure over the horizon of this portfolio is significant [see also The Ten Commandments of Commodity Investing]:

Growth of $1 Million Over 30 Years @ Annual Return Of:
Portfolio Expense Ratio 5% 10% 15%
Simple (But Effective) Safe Haven Portfolio 0.43% $3,821,319 $15,514,931 $59,173,518
Actively-Managed Mutual Fund Portfolio 1.00% $3,243,398 $13,267,678 $50,950,159

While this can certainly be used as an all encompassing group of holdings, those wishing to shift their exposure to “safer” asset classes can also use this model portfolio as a smaller part of their overall group of holdings.

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Disclosure: Certain sections of this article were republished with permission from ETFdb.com. Click here to view the original portfolio. No positions at time of writing.

About Daniela Pylypczak

Daniela Pylypczak-Wasylyszyn is a regular contributor to CommodityHQ.com, where she primarily focuses on commodity producers equities. She is also an analyst for ETFdb.com, where she contributes articles and analysis each week. Since joining the team in 2011, Daniela has quickly grown to be one of the most widely-followed authors in the industry. Her articles are syndicated in a number of online publications, including Financial Advisor Magazine, Fidelity.com, and Yahoo! Finance. Daniela is also a contributor for TraderHQ.com and Dividend.com. Daniela graduated from DePaul University with a bachelor’s degree in finance and economics.
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