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An Aggressive Portfolio For Investors Using Modern Portfolio Theory

Summary The aggressive allocation strategy incorporates a mere 15% of the portfolio to bonds. The portfolio also contains 8% to utilities and 25% to equity REITs which are sensitive to movements in interest rates. This kind of portfolio is designed for an investor that can bear substantial risk and is willing to have the portfolio rebalanced at regular intervals. I’ve selected a combination of the Schwab and Vanguard funds that I find attractive. Several are in my portfolio. Facing expectations for an increase in domestic short-term rates, portfolio strategy has been on my mind. Frequent readers will know that I cover mREITs a great deal and invest a material portion of my portfolio in the mREITs that I consider most attractive. In this piece, I want to talk about a strategy that I think would be very reasonable for the rest of the portfolio. Before we get into the allocations, I want to stress that this is designed as an aggressive portfolio and for many investors, this portfolio would simply be too risky. I have a long-time horizon, and aggressive allocations make sense for me. Each investor should carefully consider their circumstances. The Strategy I feel that a portfolio like this would be most useful under MPT (Modern Portfolio Theory). The portfolio would be designed with the expectation of frequently rebalancing positions. That can be a problem for investors that are holding their positions across several accounts or don’t have free trading on the securities. Several of these ETFs will qualify for free trading through either Schwab or Vanguard but not both. I’d love to see each of those brokerages bring out additional funds to make it possible for an investor to select funds from only one brokerage for this strategy. It might be possible through Vanguard, but I’m more familiar with Schwab’s international options. Tax Exempt For the purpose of this article, I’m assuming the accounts are retirement accounts that are tax exempt. Some investors may figure that this would be a problem because the employer sponsored 401k is unlikely to have all of these options, but I’ve personally had success with rolling former employer 401k accounts into IRA accounts. The heavy weight for domestic equity REITs would be fairly strange for an investor facing higher income taxes on the position. Asset Allocation That domestic total allocation of 65% could be treated as a home country bias and there may be some arguments for moving that combined position down to 60% of the total portfolio so that international positions and bonds can be increased. For now, I’m going to go with 65% in the combination of domestic equity and domestic equity REITs. Many investors may think 40% into traditional equity with 25% into equity REITs is incredibly heavy on equity REITs, but I see the lack of corporate taxation as a huge and durable advantage for providing superior growth. Domestic Equity The first 40% gets broken up between three funds: I’ve used the Schwab U.S. Broad Market ETF (NYSEARCA: SCHB ) over the Vanguard Total Stock Market ETF (NYSEARCA: VTI ) on the basis of a .01% lower expense ratio. This is fairly small, but I’m long both ETFs in different accounts. I’m also using the Schwab U.S. Dividend Equity ETF (NYSEARCA: SCHD ) and love the defensive allocations. In this case, I opted to use the broad market ETF because I’m combining it with the Vanguard Consumer Staples ETF (NYSEARCA: VDC ) and the Vanguard Utilities ETF (NYSEARCA: VPU ) to make the combined domestic equity position significantly more defensive. Equity REITs This is fairly simple. Investors could use the Vanguard REIT Index ETF (NYSEARCA: VNQ ) or the Schwab U.S. REIT ETF (NYSEARCA: SCHH ). For investors seeking higher dividend payouts, the easy answer is VNQ. Since I have a very long time until the retirement and the portfolios are very similar, I’ve been adding more to my SCHH holdings since it has free trading a lower expense ratio. International As I noted at the start of the article, I’m more familiar with Schwab’s international options than with Vanguard’s. The Schwab International Equity ETF (NYSEARCA: SCHF ) gets only 5% of the portfolio and matches the Schwab Emerging Markets ETF (NYSEARCA: SCHE ). The heaviest weight goes to the Schwab International Small-Cap Equity ETF (NYSEARCA: SCHC ) because I want the international equity allocations to favor smaller companies on the assumption that they will earn more of their revenues from the international market. I don’t have much use for overweighting multinational companies that happen to have their headquarters in a different country. Therefore, I prefer the smaller companies in this space. Bonds I went with a mix of the Schwab U.S. Aggregate Bond ETF to get very high credit quality (including treasuries) and fairly moderate duration and the Vanguard Long-Term Corporate Bond Index ETF (NASDAQ: VCLT ) for a higher yield. The long duration on high credit quality corporate issues allows the fund to still exhibit a negative correlation with the S&P 500 while offering significantly stronger yields than treasury securities of the same long maturity. One Problem Using a portfolio like this would be ideal for an aggressive investor that is ready to put a rebalancing plan in place. Some of the brokerages will offer options to create an automatic portfolio and will allow users to influence the allocations. When I tested out Schwab’s feature for it, I was disappointed to find that some of my favorite Schwab funds were not included in the options. Of course, Schwab also does not have an equivalent option to VDC or VPU in its group of funds with extremely low expense ratios. If it rolls out an option that would allow automatic rebalancing across the account with my favorite ETFs included, I would be very interested in trying it. I wouldn’t want to incorporate my mREIT positions into that part of the portfolio, but I would feel comfortable designing a weighting system for the rest of my portfolio that would be automatically rebalanced. One of the funds I was disappointed to see excluded from the system was SCHH. Since this kind of rebalancing system would be problematic outside of tax-exempt accounts, I would really want to be able to run a heavy equity REIT allocation. Conclusion I’d love to see brokers continue to develop their portfolio management tools so that it is simple for investors to set up a portfolio like this. They would need to be careful about handling things such as rebalancing and allow investors to set a goal like to rebalance individual positions when the bid-ask spread is only one cent.

RSX: OPEC, Sanctions On Turkey And The Stubborn Ruble

Summary OPEC fails to provide support to oil prices, posing a significant risk for RSX. The story with Turkey is evolving as I predicted, and does not add much to the bear thesis. The ruble remains relatively overvalued. Market Vectors Russia ETF (NYSE: RSX ) had an interesting November. The ETF moved up and down, fueled by implications of Paris attacks, the shooting of the Russian jet by Turkey and the fluctuations of oil prices. In this article, I’ll focus on two major developments – the Russian sanctions on Turkey and OPEC’s decision to leave things as they are. Turkey In my article on RSX that was published right after the jet incident I stated that Russia’s response won’t be harmful for RSX components. This what exactly happened. In essence, Russia banned tourism and food from Turkey. The food ban comes into power on January 1, 2016, but multiple reports from Russian media show that it is already next to impossible to bring food from Turkey in reasonable time due to customs’ intense checks. Short-term, this will increase inflation, as Russia imports most fruits and vegetables that it consumes in winter because of obvious geographical reasons. As for RSX holdings , this might hurt the retailer Magnit, but I don’t think that it will have a big impact on Magnit’s bottom line. Russian president promised more sanctions on Turkey, but so far there was more harsh talk than real actions. Given the nature of the incident, tourism and food bans are a very light response. I anticipate more words (like the recent mutual accusations of involvement in the ISIS oil trade) from both sides as politicians want to score some points, but I expect little action. Among RSX holdings, the biggest risk is on Sberbank (OTCPK: OTCPK:SBRCY ), which is the fund’s biggest holding. Sberbank owns DenizBank, which is a notable player in the Turkish market. In the latest interview to the Russian media, Sberbank’s head German Gref stated that he saw no significant risks for Sberbank in Turkey, and I agree with his assessment. OPEC OPEC’s decision to live things as they were was predictable, but, nevertheless, was bad for Russia. I think that OPEC’s inability to function as an organization will put more pressure on the oil market. I recently argued that a perfect storm could push oil to $25 per barrel. Such a drop will push RSX way past the lows of December 2014. However, even current prices present an enormous threat to the Russian economy as the country eats through its emergency funds. The ruble The ruble (which is an important factor for the dollar-denominated RSX) stays relatively strong given the current oil price. The ruble-denominated oil price stubbornly stays around 2900 per barrel, while the Russian budget for 2016 needs at least 3150 per barrel. Sanctions on Turkey limit the Central Bank’s ability to decrease the rate, which is currently at 11% . However, if oil stays weak in the beginning of 2016, I expect that the Central Bank will have to cut the rate to provide some help to the Russian budget. Bottom line I remain bearish. RSX was clearly not the easiest short trade in the last few months. There was some optimism about Russia and buying activity was real. However, I question the Russian economy’s ability to successfully operate at current oil price levels. Also, as I think that the next leg down in oil is around the corner, I expect further weakness in RSX.

ETF Update: A Look Back At November And 9 Funds To Kick Off December

Summary Every week, Seeking Alpha aggregates ETF updates in an effort to alert readers and contributors to changes in the market. There were 9 launches last week and a total of 21 in November. Have a view on something that’s coming up or a new fund? Submit an article. Welcome back to the SA ETF Update. My goal is to keep Seeking Alpha readers up to date on the ETF universe and to gain some visibility, both for the ETF community, and for me as its editor (so users know who to approach with issues, article ideas, to become a contributor, etc.) Every weekend, or every other weekend (depending on the reader response and submission volumes), we will highlight fund launches and closures for the week, as well as any news items that could impact ETF investors. There were 21 launches in November, with just 2 closures, so a net gain of 19 funds. Taking a look back, we see a continuing focus on Smart Beta ETFs. These are funds that hope to capitalize on the perceived systematic biases or inefficiencies in the market, rather than the traditional index construction around market capitalization or sectors. This has been a growing trend in the industry and I expect to see more before the end of the year. November Total Launches Fund Name Ticker iShares Currency Hedged MSCI ACWI Minimum Volatility ETF HACV iShares Currency Hedged MSCI EAFE Minimum Volatility ETF HEFV iShares Currency Hedged MSCI EM Minimum Volatility ETF HEMV iShares Currency Hedged MSCI Europe Small-Cap ETF HEUS iShares Currency Hedged MSCI Europe Minimum Volatility ETF HEUV BlueStar TA-BIGITech Israel Technology ETF ITEQ First Trust SSI Strategic Convertible Securities ETF FCVT PowerShares Russell 1000 Low Beta Equal Weight Portfolio USLB PowerShares FTSE International Low Beta Equal Weight Portfolio IDLB AlphaClone International ETF ALFI Goldman Sachs ActiveBeta International Equity ETF GSIE FlexShares Currency Hedged Morningstar DM ex-US Factor Tilt Index Fund TLDH FlexShares Currency Hedged Morningstar EM Factor Tilt Index Fund TLEH Global SmallCap Dividend Fund GSD iShares Core International Aggregate Bond ETF IAGG First Trust Heitman Global Prime Real Estate ETF PRME WisdomTree Global Hedged SmallCap Dividend ETF HGSD Etho Climate Leadership U.S. ETF ETHO Deutsche X-trackers FTSE Developed ex US Enhanced Beta ETF DEEF Deutsche X-trackers Russell 1000 Enhanced Beta ETF DEUS FlexShares Real Assets Allocation Index Fund ASET Fund launches for the week of November 30th, 2015 SPDR Fossil Fuel Free ETF opens for business (12/1): Among the top holdings of the SPDR S&P 500 Fossil Fuel Free ETF ( SPYX ) are Apple (NASDAQ: AAPL ), Microsoft (NASDAQ: MSFT ), GE (NYSE: GE ), J&J (NYSE: JNJ ), Wells Fargo (NYSE: WFC ), Amazon (NASDAQ: AMZN ), Berkshire Hathaway (NYSE: BRK.A ), JPMorgan (NYSE: JPM ), Facebook (NASDAQ: FB ), and Alphabet (NASDAQ: GOOG ). The gross expense ratio is 0.25%, the net 0.20%. Alpha Architect launches a new active ETF (12/2): The MomentumShares U.S. Quantitative Momentum ETF (BATS: QMOM ) picks its holdings with a quantitative model designed to find positive momentum firms. As detailed by the company’s whitepaper on QMOM, “We consider the term momentum to mean a continuation of past returns-past winners tend to be future winners, while past losers tend to be future losers.” State Street launches 3 new factor-focused SPDR funds (12/4): State Street’s (NYSE: STT ) new funds all select high-value, high-quality and low-size firms from within the Russell 1000. However, each tracks a different fourth factor as well, included in the name of the funds: The SPDR Russell 1000 Momentum Focus ETF (NYSEARCA: ONEO ), the SPDR Russell 1000 Low Volatility Focus ETF (NYSEARCA: ONEV ) and the SPDR Russell 1000 Yield Focus ETF (NYSEARCA: ONEY ). These 3 funds all fall into SPDR’s growing selection of Smart Beta ETFs. Direxion launches a new fund and brings 2 back from the dead (12/4): The Direxion Daily S&P Biotech Bear 1X Shares (NYSEARCA: LABS ) offers inverse exposure to the S&P Biotechnology Select Industry Index, which is the index of choice for the SPDR S&P Biotech ETF (NYSEARCA: XBI ). If the Direxion Daily Natural Gas Related Bear 3X Shares (NYSEARCA: GASX ) and the Direxion Daily Healthcare Bear 3X Shares (NYSEARCA: SICK ) sound familiar, it’s because we have seen them before. GASX and SICK were shut down in Q3 2014 and Q3 2014 respectively. SICK’s bull counterpart, the Direxion Daily Healthcare Bull 3x Shares ETF (NYSEARCA: CURE ), had been seeing strong growth until May, which may have been when Direxion decided to give SICK another chance. The first ETF focused on Latin American REITs (12/4): The Tierra XP Latin America Real Estate ETF (NYSEARCA: LARE ) offers investors access to real estate investment trusts (REITs) and real estate operating companies (REOCs) in Latin America. According to a press release at the launch, this ETF was a big team effort: “The ETF was introduced by a partnership between Tierra Funds, ETF Managers Group, ISE ETF Ventures, and XP Gestão de Recursos, an XP Group company.” This is the first ETF targeting Latin American REITs specifically. There were no fund closures for the week of November 30, 2015 Have any other questions on ETFs or ETNs? Please comment below and I will try to clear things up. As an author and editor I have found that constructive feedback is the best way to grow. What you would like to see discussed in the future? How can I improve this series to meet reader needs? Please share your thoughts on this first edition of the ETF Update series in the comments section below. Have a view on something that’s coming up or a new fund? Submit an article .