An ETF Portfolio For The 4th Quarter

Submitted by Sizemore Investment Letter as part of our contributors program

As I wrote late last week, we are in the midst of a monetary arms race in which Fed Chairman Ben Bernanke and ECB President Mario Draghi are tripping over themselves to see who can inject more liquidity into the financial markets.  The result will be a bull run in just about everything: stocks, non-treasury bonds, commodities, real estate.  You name it, and it’s probably going to enjoy a nice finish to 2012.

Through gritted teeth, I would even include gold in the list, though not for the reason most gold bugs would expect.  No, I do not see gold rising as a viable inflation hedge or crisis hedge; I see it rising precisely because it has become a risk asset like everything else (see “A Bad Investment and Getting Worse” for my views on the barbarous relic.  The article is old but the arguments are as valid as ever.)

There are still risks, of course.  Europe could still come unhinged due to political infighting, and the United States is still staring over a fiscal cliff.  China may slow worse than the even the bears expect, and the Middle East could erupt into a full-blown war at any time.

For all of these reasons, investors should stay nimble and be prepared to sell some of their more volatile positions if the need arises.  But in the meantime, it makes sense to be invested as aggressively as your blood pressure will allow to take advantage of the most bullish coordinated monetary easing in modern history.

With this said, how should investors position their portfolios for the remainder of 2012?

For moderately aggressive investors, I would recommend an ETF portfolio that looks something like this:

Sixty percent of the portfolio is allocated to high-quality American and international dividend-paying stocks via the positions in $VIG, $DLN, and $PID.  I would be comfortable holding this segment of the portfolio for the next 12-24 months, come what may in the capital markets.

With the remaining 40% of the portfolio, I recommend taking shorter-term tactical positions in technology shares ($XLK), beaten-down periphery Eurozone shares ($EWP) and select emerging market positions ($TUR and $AFK).

Within the emerging market sphere, I am particularly bullish on the Middle East and Africa.  With all of the investor fascination on the “BRICs” in recent years—and particularly on Brazil and China—Middle Eastern and African markets have been largely off the radar.  This means that there are far fewer disillusioned investors in these markets ready to foreswear them for the “next big thing.”   Furthermore, particularly in the case of Africa, the relative isolation and low economic baseline mean that these markets have been less affected by the fallout from the 2008 meltdown and have the best long-term growth prospects.

A prudent word of warning: this portfolio promises to be volatile, so make sure that you have stop losses in place or some other form of risk control, particularly in the 40% of the portfolio allocated to tactical positions.  I expect this portfolio to finish the year strongly, but the events of the past two years have taught us that it pays to have risk control in place. And as always, the standard caveat applies: this is intended as general information and not as specific investment advice.

Disclosures: Sizemore Capital is long VIG, DLN, PID, XLK, EWP, TUR and AFK in its Tactical ETF Portfolio.  This article first appeared on MarketWatch.

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