An ETF Permanent Portfolio

By Aaron Levitt | November 02, 2010 AAA

While the worst may be behind the stock market, there is still a level of uneasiness with money managers. Another round of quantitative easing is in the cards, debt problems still plague Europe, and poor weather is wreaking havoc with the commodities markets. There is certainly a lot to be worried about, and this fear has many investors looking for the best portfolio mix to steadily grow their assets, while protecting against crises. They may find the desired mix in an old method of portfolio construction.

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Harry Browne
The permanent portfolio method of portfolio construction was created by free-market investment analyst and a two-time Libertarian Party candidate for President, Harry Browne, in the 1980s. Browne's portfolio gave exposure to growth stocks, precious metals, cash and government bonds, with the idea that the mix was safe and profitable in almost any economic cycle. Historically, these asset classes have low correlations to each other, and they rarely move in tandem. By exploiting this fact, Browne was able to create a portfolio of various moving parts that has produced an after-tax gains of 9.34% over the past ten years, compared to the 1.59% loss by SPDR S&P 500 (NYSE:SPY).

Browne's original mix called for an equal weighting among the four asset classes. Today, the Permanent Portfolio mutual fund (NASDAQ:PRPFX) is currently run by Michael Cuggino, and it uses a slightly different mix of asset classes. However, the basic principal is the same. From 2003 to 2009, the original mix of U.S. bonds and dollar denominated assets - gold, growth stocks, natural resources, real estate, Swiss Francs and silver - has produced an annual return of 8.92%

Replicating the Strategy
The permanent portfolio represents a great core strategy for investors. With the birth and wide adoption of exchange traded funds, investors can replicate Browne's model easily. This also allows investors to tweak the portfolio as they see fit. The portfolio is not a trading vehicle, but should be rebalanced about every six months to keep the percentages in check. Browne advised having a separate "speculative portfolio" for individual stocks and side bets.

Allowing for gains in prosperous times, the fund allocates a 15% weighting towards growth stocks. Browne advocated using an indexing strategy rather than individual stock picking. Investors can add the iShares S&P 500 Growth Index (NYSE:IVW), which follows the 308 growth stocks within the S&P 500. The Vanguard Small Cap Growth ETF (NYSE:VBK) can be used to add higher growth small-caps. (For related reading, take a look at How to Play the Small-Cap Comeback)

Acting as an inflation hedge, the portfolio weights 25% to precious metals. The new ETFS Physical Precious Metal Basket (NASDAQ:GLTR) holds gold, silver, platinum and palladium. This gives investors easy access to not only the hot gold market, but also the industrial demand for silver and palladium.

Fifteen percent of the portfolio is domiciled in natural resource stocks and real estate. The Market Vectors RVE Hard Assets Producers ETF (NYSE:HAP) is one of the best broad based natural resources funds, with weightings in everything from energy to water companies. The SPDR Dow Jones International Real Estate (NYSE:RWX) is the most traded international REIT fund and can be used for a proxy for the sector.

For the 35% devoted to bonds and treasuries, many permanent portfolio followers believe in owning a ladder of individual U.S. Treasury bonds. The only ETF that does this is the PowerShares 1-30 Laddered Treasury (NYSE:PLW), which owns bonds from the entire yield curve spectrum. Investors can also use the popular iShares Barclays Aggregate Bond (NYSE:AGG) as a substitute.

Finally, nearly 10% is allocated towards Swiss assets, which are seen as another "safe haven". Both the iShares MSCI Switzerland Index (NYSE:EWL) and CurrencyShares Swiss Franc Trust (NYSE:FXF) offer exposure to the Swiss economy.

Bottom Line
Despite the market's recent gains, there's still uncertainty about the health of the global economy. Many are looking for ways to play it safe, while still participating in any upswing in the markets. The answer could lie with exchange traded funds. And Harry Browne's permanent portfolio model can help you choose the best ETFs to create a steady, core portfolio. (For related reading, take a look at Permanent Portfolio Locks In Long-Term Profits.)


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