Creating a Permanent ETF Portfolio

The Permanent Portfolio mutual fund, ticker PRPFX, is a popular mutual fund from the Permanent Portfolio Family of Funds with the stated investment objective “to preserve and increase the purchasing power value of its shares over the long term”. The fund has performed relatively well in recent years when compared to the S&P 500 and has underperformed the S&P 500 since the funds inception (12/1/82). For full performance statistics visit the fund’s site or view the fact sheet here (opens pdf file)

The fund’s “portfolio structure” shows the Target Percentages for the Permanent Portfolio:

Gold 20%
Silver 5%
Swiss Franc Assets 10%
U.S. and Foreign Real Estate and Natural Resource Stocks 15%
Aggressive Growth Stocks 15%
U.S. Treasury Bills, Bonds and Other Dollar Assets 35%

This portfolio structure helps explain the fund’s performance in recent years as Gold, Silver, and US Treasuries have performed relatively well.  According to the fund’s fact sheet the top 10 holdings, as of 12/31/11, were:

Gold Coins 13.88%
Cash and Cash Equivalents 7.09%
Gold Bullion 5.34%
Swiss Franc Bank Account 5.46%
Silver Bullion 4.08%
U.S. Treasury Bonds 6.00% 2-15-26 1.17%
U.S. Treasury Bonds 6.25% 8-15-23 1.16%
U.S. Treasury Bonds 5.25% 11-15-28 1.12%
U.S. Treasury Bonds 4.50% 2-15-36 1.06%
U.S. Treasury Notes 7.25% 5-15-16 1.04%

I read on World Beta the other day that Global X had filed for a Permanent Portfolio ETF. It will be interesting to see how this new ETF looks once it is launched.  However, an investor could also look at the stated portfolio structure of PRPFX and try to replicate it using ETFs.

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I created an “Permanent ETF Portfolio” using ETFReplay.com.  It is not possible to exactly replicate PRPFX, since its holdings change frequently and it holds individual stocks.  However, I did use its stated portfolio structure to create an ETF portfolio with the following allocation:

Ticker Name Allocation
FXF Swiss Franc CurrencyShares 10.00%
GLD SPDR Gold Shares 20.00%
HYG iShares iBoxx High-Yield Corp Bond (4-5yr) 5.00%
IEF iShares Barclays 7-10 Yr Treasury (7-8yr) 5.00%
IGE iShares S&P N. Amer Nat. Resources 5.00%
VUG Vanguard MSCI U.S. LargeCap Growth 7.50%
IWO iShares Russell 2000 Growth 7.50%
LQD iShares iBoxx Invest Grade Bond (7-8yr) 5.00%
RWX SPDR DJ International Real Estate 5.00%
SHY Barclays Low Duration Treasury (2-yr) 5.00%
SLV iShares Silver Trust 5.00%
TIP iShares Barclays TIPS (4-8yr) 10.00%
TLT iShares Barclays Long-Term Trsry (15-17yr) 5.00%
VNQ Vanguard MSCI U.S. REIT 5.00%

I then tested this portfolio as a buy and hold portfolio since 1/1/2008.  Any backtest using ETFs is limited by the trading history of the ETFs themselves; thus, I started this backtest in 2008 since some of the ETFs listed began trading in 2007.  It is difficult to draw significant long-term conclusions from such a short test, but it is interesting to compare the results to PRPFX. The results from 1/2/08 – 2/2/12

A then ran a 3 year test from 12/31/08 – 12/30/11.  The 3 year return statistics are similar when compared to the data provided on the fact sheet for PRPFX which showed a 3-year return before taxes of 13.21%:

 

I then decided to add a twist to my hypothetical “Permanent ETF Portfolio”. What if, like some of my other momentum and tactical portfolios, we only held the ETFs in the portfolio when they were above their 10 month moving average?  My expectation was that the portfolio drawdown and volatility would be reduced, since the “Permanent ETF Portfolio” had a drawdown of -26.52% (still significantly better than SPY’s 51.88% over the same period) and volatility of 12.1%.

When an ETF in the portfolio was below its 10 month moving average at month-end, the position was sold and held in “cash” (SHY was used as the cash position). When it closed the month above its 10 month moving average, the ETF was purchased at the stated allocation. This is a similar strategy to that used in Faber’s Ivy Portfolio. The results for this added test, for 2008-2011, are below:

 

Note: HYG was excluded from the first month of this test (January 2008) since it did not have sufficient trading history to generate a 10 month moving average until the following month.

As you can see, returns were similar to our previous test but volatility and drawdown both decreased.  The strategy returned a modest 7.9% annually but did so at 8.1% volatility and a max drawdown of -9.2%. It also posted a 1.8% return in 2008, when SPY returned -36.8%. However, during SPY’s bull run of 2009 when it returned 26.4%, this Permanent ETF Portfolio returned a modest 10.7%.

Please note all results are hypothetical and commissions and taxes were not included in the results. No positions in securities mentioned

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Disclaimer: Stock Loon LLC, Scott's Investments and its author is not a financial adviser. Stock Loon LLC, Scott's Investments and its author does not offer recommendations or personal investment advice to any specific person for any particular purpose. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of www.scottsinvestments.com

One thought on “Creating a Permanent ETF Portfolio

  1. Pingback: BullseyeMicrocaps.com » Building A Permanent ETF Portfolio, Part II

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