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Model Portfolios Built with ETFs, Part 4

Posted By Guest Contributor On 04/23/2007 @ 3:02 pm In Investing | 2 Comments

This is a guest post by Sun of Sun’s Financial Diary and is the fourth segment of the Model Portfolios Built with ETFs series. Part III can be found here [3].

So far in this series, I have discussed possible choices to build some well-known portfolios with nothing but ETFs. Looking back at the six model portfolios being covered, we can easily see that none of them has exposure in the precious metal sector, one that is considered as a good diversifier in a portfolio due to its weak correlation with other major asset classes. In this part, we will have a chance to build a portfolio that has a new element: precious metal.

In his discussion of model portfolios [4], Jonathan at My Money Blog used an example from the book, The Intelligent Asset Allocator by William Bernstein, to introduce precious metal into the picture. The bold investor portfolio has 70% in stocks and 30% in bonds and consists of the following asset classes:

  • S&P 500 index: 10%
  • Small-cap stocks: 10%
  • REIT: 10%
  • International larg-cap stocks: 10%
  • International small-cap stocks: 10%
  • Emerging markets stocks: 10%
  • Precious metals: 10%
  • U.S. short-term bonds: 30%

Except precious metals, possible ETFs for all other components of this portfolio have been discussed before (in part I [5] and part II [6] of this series), thus, will not be repeated here. Using Morningstar’s [7] ETF list, I identified the following precious metal ETFs as candidates for this portfolio:

  • streetTRACKS Gold Shares (GLD [8])
  • iShares COMEX Gold Trust (IAU [9])
  • PowerShares DB Gold (DGL [10])
  • Market Vectors Gold Miners (GDX [11])
  • PowerShares DB Precious Metals (DBP [12])
  • PowerShares DB Silver (DBS [13])
  • iShares Silver Trust (SLV [14])

Among them, GLD and IAU have longer tracking record than the new comers such as PowerShares’ DGL, which incepted in January, and GLD is the leader in both net assets and trading volume. Another key difference between GLD, IAU and DGL is that both GLD and IAU are directly backed by bullion and their share values are based on the price of spot gold, while DGL mainly invests in gold future contract (more on DGL [15]).

Symbol ER (%)
Yield (%) YTD return (%) 1-yr return (%)
GLD 0.40 N/A 7.85 14.20
IAU 0.40 N/A 7.37 13.79
DGL 0.50 N/A 8.58* N/A
GDX 0.55 N/A 6.11 N/A
DBP 0.75 N/A 8.68* N/A
DBS 0.50 N/A 9.12* N/A
SLV 0.50 N/A 8.75 N/A

As the above table shows, most ETFs in the precious metal sector have been around for only several months, thus, it’s difficult to evaluate their performance. For GLD and IAU, the price of spot gold will determine their share prices. Considering that precious metal can be a powerful force in boosting a portfolio’s return [16], a 10% allocation seems to be appropriate.

*3-month return

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URLs in this post:

[1] Tweet: http://twitter.com/share

[2] Email: mailto:?subject=http://www.bargaineering.com/articles/model-portfolios-built-with-etfs-part-4.html

[3] here: http://www.thesunsfinancialdiary.com/2007/03/13/model-portfolios-built-with-etfs-iii-all-about-asset-allocation/

[4] model portfolios: http://www.mymoneyblog.com/archives/2007/01/model-portfolio-4-the-intelligent-asset-allocator.html

[5] part I: http://www.thesunsfinancialdiary.com/2007/02/16/model-portfolios-built-with-etfs-i-couch-potato-portfolio/

[6] part II: http://www.thesunsfinancialdiary.com/2007/02/21/model-portfolios-built-with-etfs-ii-the-boglehead%e2%80%99s-guide-to-investing/

[7] Morningstar’s: http://www.bargaineering.com/articles/r/morningstar.php?tag=ModelPorfolios

[8] GLD: http://quote.morningstar.com/ETFQuote.html?TimeFrame=D1&ticker=GLD

[9] IAU: http://quote.morningstar.com/ETFQuote.html?TimeFrame=D1&ticker=IAU

[10] DGL: http://quote.morningstar.com/ETFQuote.html?TimeFrame=D1&ticker=DGL

[11] GDX: http://quote.morningstar.com/ETFQuote.html?TimeFrame=D1&ticker=GDX

[12] DBP: http://quote.morningstar.com/ETFQuote.html?TimeFrame=D1&ticker=DBP

[13] DBS: http://quote.morningstar.com/ETFQuote.html?TimeFrame=D1&ticker=DBS

[14] SLV: http://quote.morningstar.com/ETFQuote.html?TimeFrame=D1&ticker=SLV

[15] more on DGL: http://www.thesunsfinancialdiary.com/2007/01/17/dgl-powershares-gold-play/

[16] a powerful force in boosting a portfolio’s return: http://www.thesunsfinancialdiary.com/2007/04/09/how-long-can-you-triple-your-money-and-how-to-triple-it/

Thank you for reading!