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Creating Your Own Permanent ETF Portfolio

Creating Your Own Permanent ETF Portfolio
Ron DeLegge, Editor
May 4, 2011

SAN DIEGO ( – Investment fads come and go but one strategy that attempts to be good all the time is the “Permanent Portfolio” concept. What is it and how does it work?

The “Permanent Portfolio” was developed by free-market investment analyst Harry Browne in the 1980s. Browne assembled an investment portfolio that gave equal exposure to growth stocks, precious metals, cash and government bonds. According to his theory, this type of investment mix would be safe and profitable in any kind of economic cycle. 

Using Browne’s ideas as the basis for an investment strategy, the Permanent Portfolio mutual fund (Nasdaq: PRPFX) was launched in 1982. Despite lagging the S&P 500 index (NYSEArca: SPY) since its inception, the Permanent Portfolio has produced an after tax gain of 11.78% over the past ten years compared to a gain of just 2.78% for the S&P 500.  

Today, the San Francisco, CA-area based fund is managed by Michael Cuggino, a certified public accountant by training. Currently, Cuggino aims for the following investment mix: 35% in U.S. Treasuries, bonds and other dollar denominated assets, 20% in gold, 15% in aggressive growth stocks, 15% in natural resources stocks and domestic and foreign real estate, 10% in Swiss Francs and 5% in silver.

Constructing a Permanent ETF Portfolio
One problem with the Permanent Portfolio fund isn’t so much its strategy as its annual expenses of 0.77%. That’s a lot of money to fork over in investment fees, especially for a mutual fund that invests 60% of its assets in cash, precious metals and U.S. Treasuries. What if we replicated the Permanent Portfolio but with operating lower costs?

Below is an example of how the Permanent Portfolio using ETFs would look. The corresponding ETF ticker symbols are right next to each asset class.

35% in U.S. Treasuries (NYSEArca: TLH) and U.S. Corporate Bonds (NYSEArca: LQD)
20% in Gold (NYSEArca: IAU)
15% in Natural Resources (NYSEArca: GNR) and Foreign Real Estate Stocks (NYSEArca: RWX)
15% in Large Cap Growth Stocks (NYSEArca: VONG)
10% in Swiss Francs (NYSEArca: FXF)
 5% in Silver (NYSEArca: SIVR)

The expenses averaged out for the ETF Portfolio using the Permanent Strategy amount to 0.32% compared to 0.77% for PRPFX. That’s an extra half-percent in savings for the portfolio’s owner morning coffee and then some!

Even though the Permanent Portfolio theory has worked over the past decade, there are a few caveats to keep in mind.

First, its performance is likely lag stocks in a rising market because of its heavy exposure to cash, bonds and precious metals. Also, long-periods of underperformance for precious metals like the time period that stretched from 1980-2008 will put a damper on future performance.

Lastly, the Permanent Portfolio strategy isn’t especially attractive for income minded investors. At the end of March, PRPFX’s dividend yield was a mere 0.61% and even worse, that entire yield is being fully consumed by the fund’s 0.77% annual expense ratio.

In summary, the Permanent Portfolio can be easily accomplished using lower cost ETFs. For other portfolio building strategies check out ETFguide's six Ready-to-Go ETF Portfolios.  

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