StumpGrinder: Our ETF Arsenal

Posted on April 7, 2013 by

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We use an elite group of 12 ETFs in the StumpGrinder portfolio.

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Hey, these ETFs are boring!

Well, perhaps they are, but that’s part of the plan. Our approach centers on combining low volatility anti-correlated ETFs together to produce ultra-smooth overall portfolio performance. We can then leverage the portfolio to increase return while retaining the low vol performance.

One innovation in StumpGrinder centers on combining these ETFs in just the right proportions. For that we’ll rely on some serious number crunching.  More on that in another post.

This list of ETFs was developed in collaboration with a leading wealth advisor who has been managing a similar portfolio with great success.  We’re benefiting significantly from his insight.

Our holdings: Liquid ETFs

We’re going to build this portfolio using a group of actively traded ETFs that represent significant asset classes for a diversified portfolio. We are not going to use mutual funds or individual stocks. There are lots of good reasons for using ETFs, but not enough space here to explain in detail. I’ll devote a separate blog to the reasoning behind our use of ETFs versus individual stocks or mutual funds.

Here’s what we’re looking for in an ETF:

  • Liquidity: When we want to get in or get out of a position we don’t want market impact to cost us much.  We’d also like securities that are priced fairly and quickly by an efficient market.
  • Focus: Our strategy will manage risk and diversification by selecting allocations to different asset classes, so we’re depending on the ETFs to follow a focused, reliable approach according to their published goals.
  • Low volatility: Our analysis shows that for nearly all major fund types for which a “low volatility” ETF is available, the “low vol” version outperforms the “regular” version. If you don’t believe me, visit your favorite finance site and compare SPY to SPLV.
  • Performance: Among their focused market segments, we’re looking for the best performing ETFs. We’ll update our choice of ETFs as appropriate to meet this target.

Now on to the list of ETFs we’ll be using. There are literally hundreds we might select from. We’ve honed in on the best of the best in each category.

US Fixed Income & Bonds

Fixed income and bonds are the bedrock of a stable diversified portfolio. These are the best of the best in their categories:

  • BOND PIMCO Total Return
  • HYD Market Vectors High-Yield Muni
  • IEI iShares Barclays 3-7 Year Treasury Bond
  • SHY iShares Barclays 1-3 Year Treasury Bond
  • VCIT Vanguard Intermediate Term Corporate Bond Index

US Equities

While bonds provide stability, equities provide growth. We choose two large cap / low vol ETFs, a high dividend ETF, and a major sector ETF:

  • SPLV PowerShares S&P 500 Low Volatility
  • USMV iShares MSCI USA Minimum Volatility
  • VYM Vanguard High Dividend Yield
  • XLU Utilities SPDR

International & Emerging Markets

Believe it or not, there is growth outside the US and it is often anti-correlated to growth in the US. That’s just what we want because anti-correlated securities reduce volatility. So we add the best low vol emerging markets ETFs:

  • HILO EG Shares Low Volatility Emerging Markets Dividend
  • EELV PowerShares S&P Emerging Markets Low Volatility

Gold

Yes, you should own gold. Why? Not because William Devane says so, but because when the markets zig, gold zags. The result is that the volatility of your portfolio is reduced. That’s especially important when the market drops.

  • GLD Gold.

Disclosure:

Tucker Balch manages a fund with long positions in GLD, EELV, HILO, XLU, VYM, USMV, SPLV, BOND, HYD, IEI, SHY, VCIT.

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