Maxim Manturov, Head of Investment Advice at Freedom Finance Europe, explores an all-weather portfolio constructed through ETFs.
The S&P 500 stock index officially entered bear market territory on 13 June 2022. A 20% or more decline in the index from the last peak is said to signify a bear market, which it has steadily been moving towards for six months. It is important for investors to be prepared for such events and be aware of ways in which they can reduce risk and losses. One such way is to form an all-weather portfolio using the methodology created by renowned investor Ray Dalio, head of Bridgewater Associates, which is now the largest hedge fund in the world.
The all-weather portfolio concepts
The basic idea behind an all-weather portfolio is to diversify assets so that they remain stable in all market conditions and generate returns in almost any situation.
According to Dalio’s methodology, the structure of the portfolio should look as follows:
Long-term bonds — 40%
Stocks — 30%
Medium-term Bonds— 15%
Gold — 7.5%
Commodities — 7.5%
This method of investment protection works during both economic booms and times of recession. Although the total return of an all-weather portfolio is inferior to the S&P 500 Index, its volatility is lower, thereby providing a better risk/return ratio.
Our analysts have made the asset mix a little more sophisticated to achieve better returns and have prepared seven exchange-traded funds (ETFs) which every investor can use to build their all-weather portfolio.
ETFs for an all-weather portfolio
iShares Core S&P 500 ETF (IVV.US), is a large-cap equity fund with $278.1bn (£226.4bn) in assets under management (AUM). The ETF follows the index of the same name and includes the five hundred largest companies traded in the US. Managed by passive investment mastodon Blackrock, the iShares Core S&P 500 ETF is the second-largest index fund after the SPDR S&P 500 ETF, but it costs clients five basis points less than its competitor.
Our analysts believe in allocating 15% to this ETF, with the instruments with the greatest allocation in the ETF being Apple, Microsoft Corp, Amazon.com Inc., Alphabet Inc. Class A, and Alphabet Inc. Class C.
iShares Edge MSCI USA Size Factor ETF (QDVC.US), is a mid-cap equity fund, with $134m (£109.1m) in AUM. These issuers represent the largest segment of the US stock market and provide higher risk-adjusted returns than small- or large-cap stocks. In addition, mid-cap companies are growing and are already financially stable. The key competitive advantage of this ETF is its low management expense ratio relative to its peers.
Our analysts believe in allocating 7.5% to this ETF, with the instruments with the greatest allocation in the ETF being Diamondback Energy, APA Corp., Ulta Beauty, Dominos Pizza, and Enphase Energy.
iShare Core MSCI Europe ETF (IEUR.US), is a European large, medium, and small-cap equity fund with $4.25bn (£3.5bn) in AUM. This ETF allows for greater diversification across countries. At the same time, it does not increase institutional risk because it includes companies from developed countries, which is important in a period of turbulence and the declining popularity of risk assets. While this ETF has underperformed in its US peers in recent years, over the longer term, allocating some assets to this fund will improve returns per unit of risk taken.
Our analysts believe in allocating 7.5% to this ETF, with the instruments with the greatest allocation in the ETF being Nestle, BlackRock Cash Funds Treasury Fund, Roche Holding, Shell Plc., and ASML Holding NV.
iShare $ Treasury Bond 3-7yr UCITS ETF (CBU7.EU), is a medium-term US government bond fund with $5.85bn (£4.7bn) in AUM. The ETF invests in US government bonds with an average maturity of 3 to 7 years. This ETF is the least volatile asset in an all-weather portfolio, making it better able to withstand stock market downturns and weather economic crises with confidence. However, during economic upswings, this fund shows the weakest returns.
Our analysts believe in allocating 15% to this ETF, with the instruments with the greatest allocation in the ETF being United States Treasury Notes.
iShares $ Treasury Bond 20+yr UCITS ETF (DTLA.EU), is a long maturity US government bond fund with $2.3m (£1.9m) in AUM. The ETF has similar features to the iShares $ Treasury Bond 3-7yr fund, the main difference being the longer duration, as this ETF invests in longer securities. As a result, the iShares $ Treasury Bond 20+yr is a more volatile and interest-rate sensitive asset but retains the characteristics of a solid investment vehicle. That said, once inflation subsides to the target and rates begin to decline again, this ETF should show significant growth, comparable to the performance of some stock ETFs.
Our analysts believe in allocating 40% to this ETF, with the instruments with the greatest allocation in the ETF being United States Treasury Notes.
Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC.US), is a commodity asset fund with $9.9bn (£8bn) in AUM. The acquisition will allow you to invest in commodity instruments: gas, oil, precious metals, base metals, agricultural crops, etc. In times of elevated inflation, this ETF will show positive momentum and thereby balance the all-weather portfolio. A decline in inflation will contribute to a drawdown in this asset, but a shift in the economy to an active growth stage will bring Invesco Optimum Yield Diversified Commodity back to an uptrend.
Our analysts believe in allocating 7.5% to this ETF, with the sectors with the highest allocation in the ETF being oil, gas, base metals, and agriculture.
VanEck Vectors Gold Miners ETF (GDX.US), is a gold mining equity fund, with $11.9bn (£9.6bn) in AUM. To enhance the returns of our portfolio, we have taken the VanEck Vectors Gold Miners ETF as a gold equivalent fund. This ETF has a higher Beta relative to gold, so it will behave more volatile and potentially yield higher returns. A negative side-effect of this exposure could be an inflation-driven increase in production costs. Therefore, a key criterion for choosing this ETF was its focus on the stocks of the world’s largest and most resilient mining companies, including giants such as Newmont and Barrick Gold.
Our analysts believe in allocating 7.5% to this ETF, with the instruments with the greatest allocation in the ETF being Newmont Corp., Barrick Gold Corp., Franco-Nevada Corp., Agnico Eagle Mines, and Wheaton Precious Metals.