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Summary Uses a mix of trend-following, active, hedged, and passive management style funds. Selects a stalwart, plain-vanilla benchmark for performance going forward. Constructed in the context of an aging bull market for both equities and bonds. Many portfolios, especially from the DGI crowd, have the dynamic active benefit of additions, subtractions, and constant tweaking by their authors. We always know what they are considering buying, selling, etc., with every article. I also feel that tmy hypothetical “Prudent Portfolio for a Melt-Up or Meltdown,” discussed in 2014, is not a static experiment; it should benefit from some updating and tweaking as well. The main goal of this hypothetical portfolio was simplicity and balance using only five funds in the context of an aging bull market that could still participate if the bull market continues or could ride out some punches from a correction. Much has happened since the inception of this portfolio back in 2014. Old Portfolio and Lessons Learned: TNDQ , PHDG , AGG , GGN , and UUP The TNDQ ETN and all the other RBS ETNs have been discontinued by their sponsor. Gold has continued its downward chaffing spiral, taking = with it the GGN closed-end gold income fund. Too much portfolio weight was given to this falling knife. Tame VIX futures in contango has mercilessly beleaguered the PHDG holding with its partial volatility futures holdings. All was not dreary, as the dollar surged this year, and correspondingly, the UUP fund benefited. Bonds have been a bit of a roller coaster, but the modest net durations of the AGG ETF still provided some desirable ballast. The “Updated Melt-Up or Meltdown” Portfolio: PTNQ , VQTS , TOTL , CEF , and AMFQX Pacer Trendpilot 100 ETF (BATS: PTNQ ) This ETF replaces the recently defunct TNDQ ETN. It has a similar moving average timing strategy tracking the same alpha rich NASDAQ 100 index – but is tweaked with a “50/50” allocation before totally going to the safety of 3 month U.S. treasuries. The complete strategy is as follows: When the NASDAQ 100 index closes above its 200 day simple moving average for 5 consecutive days the fund will be 100% invested in the NASDAQ 100 index. When the NADAQ 100 index closes below its 200 day simple moving average for 5 consecutive days the fund will switch to 50% to the index and 50% to 3 month treasuries. When the NASDAQ 100 index 200 business day simple moving average closes lower than its value from five business days earlier, the exposure of the Index will be 100% to 3-Month US Treasury bills. Once this “T-Bill Indicator” has been triggered, the Index will not return to its 50/50 position until the index closes above the 200 day sma as described earlier, followed by the 50/50 Indicator being triggered as described above. In summary this fund gradually seeks to avoid a deep correction in a gradual manner using 5 business day windows for signals rather than popular end of month signals. The strategy essentially hedges in steps and attempts to limit affects of market “head fakes” of brief periods when falling below the 200 day sma. The fund already has assets of over 27 million and is less than 2 months old. The other two Pacer index based trend following ETFs are growing rapidly as well. This author is long PTNQ. See pictorial below of the hedging strategy from the folks at Paceretfs : ETRACS S&P 500 VEQTOR Switch Index ETN (NYSEARCA: VQTS ) This ETN essentially addresses the drawbacks of the strategy index that PHDG and VQT follows. It dynamically allocates between the S&P 500, VIX futures (either long or short depending on slope of the VIX futures curve), and cash. I wrote about it here as well as fellow SA contributor Vance Harwood’s nice write up here . This ETN seeks to exploit the main weakness of the regular VEQTOR index by “switching” and having a short position in VIX futures and gaining additional alpha from the negative VIX futures roll yield during periods of steep contango. It makes for an excellent replacement for PHDG from the previous portfolio. Assets are still rather on the light side at about 25 million, but this ETN is young and will likely grow to robust asset levels. Especially if there is a steep correction like we had in 2011. SPDR DoubleLine Total Return Tactical ETF (NYSEARCA: TOTL ) The iShares AGG aggregate total bond ETF’s “dumb index” has been replaced with the steadfast expertise of Jeffery Gundlach’s active management for the bond portion of the portfolio. Bonds in my opinion, especially now more than ever need some active management. With upcoming rate increases promised by the FED, a bond guru will be a welcome addition to help tame some bond angst and volatility. This ETF version of his flagship portfolio has outperformed the total bond index handily. The mild average durations of 4 years along with hands on active management should make for some nice ballast for the portfolio. This ETF has an expense ratio of 0.55% and a healthy AUM of over 850 million. More info about this fund available here . Central Fund of Canada Ltd. (NYSEMKT: CEF ) This closed-end fund replaces the beleaguered and volatile GGN fund. With gold down in the trash heap of most investors radar this well regarded CEF was chosen for the small precious metals portion of the portfolio. This fund holds marketable gold and silver bullion. The fund currently sports around a 9% discount to NAV. This popular fund has a long history and is cheaper with fees of only 0.32%. No one knows how low gold will go especially in this backdrop of a strengthening dollar and threats of higher rates, but one could catch the falling knife and could take comfort that with this fund you will at least take a position at a considerable discount to NAV. More about this fund available here . 361 Managed Futures Strategy Fund (MUTF: AMFQX ) As bonds become less desirable and correlations increasing throughout asset classes – an alternative type of fund may be beneficial to a portfolio. For this updated portfolio a managed futures strategy seemed like a logical fit for this balanced “melt up or meltdown” theme. This four star Morningstar rated 361 Managed Futures Strategy Fund uses a counter trend strategy designed to navigate choppy volatile markets. Managed futures by design have low correlations to core assets such as bonds and equities and can reduce overall risk and volatility to a portfolio. Fees run about 2%. The fund’s performance so far this year have been stellar with it being up around 10%. More about this fund available here . Weightings The weightings of the balanced Updated Prudent Portfolio for Melt-Up or Meltdown are as follows: 30% PTNQ 30% VQTS 20% TOTL 15% AMFQX 5% CEF This summarily is 60% U.S. equities (index based and systematically hedged), 20% bonds (actively managed), and 20% alternatives and precious metals (actively managed and partially passive). The Benchmark: Vanguard Balanced Index Fund (MUTF: VBINX ) This venerable stalwart is cheap, passive and effective over the long term. It’s U.S. centric and is a formidable benchmark for this upgraded portfolio. It consists simply of 60% the total U.S stock market and 40% the aggregate U.S. bond market. It’s fees are only 0.23% and that immediately gives this “Melt Up or Meltdown Portfolio” a hump that will have to be overcome with alpha and/or reduced drawdowns. It should be a fun exercise comparing this updated portfolio to the this popular passive mutual fund. Summary and Caveats The construction of this updated hypothetical portfolio was an interesting exercise. The bar is set high for the future – competing with the performance of the before mentioned Vanguard Balanced Index Fund. In the context of an aging bull market for both equities and bonds it seemed timely for portfolio mixes of smart beta, index hedged, managed futures, and active management funds to hopefully shine in some outperformance in the years to come. One could use Morningstar or portfoliovisualizer.com,etc. to track it. Always read prospectuses and other fund literature before investing. Always use limit orders for lightly traded funds. Disclosure: I am/we are long VQTS, PTNQ. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Scalper1 News
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