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"Thank you, God!"
These immortal words from the movie "Animal House," spoken when a Playboy bunny was catapulted into the bed of a pubescent boy, were shouted along Wall Street last week when God's earthly financial counterpart, the Federal Reserve, slashed interest rates by half a point.
Investors' reaction was rational, for the Fed's action erases some of the huge uncertainty surrounding risky assets -- and all investments are risky, to one degree or another. We'll surely enjoy some further excitement before we sing "Auld Lang Syne," but we can be pretty confident our portfolios will be as fat as our Christmas geese.
(Actually, in our family it's Christmas beef; we tried a goose once and had Christmas grease. This year, that's a hedge-fund meal. But I digress.)
From Beijing to Broad and Wall, the September festivities were riotous, but they came after an exhausting July and August that were as cranky as an unfed infant. So even with the benefit of this month's rally, my model portfolio of exchange-traded funds eked out a gain of only 1.8% in the third quarter.
Still, that was better than the market itself. S&P 500 SPDR (SPY, news, msgs), the ETF that tracks the Standard & Poor's 500 Index ($INX), crept ahead only 0.63% in the period. So far this year my model is ahead with a 10.9% gain, compared with the index's 8.5% advance.
(For production reasons, third-quarter data are from June 21 through Sept. 20.)
Risk, reward
Although taking risks was often costly in the third quarter, three of the portfolio's riskiest assets were the top performers, paced by the dazzling 12.1% return of Claymore/BNY BRIC ETF (EEB, news, msgs). PowerShares Dynamic Mid Cap Growth Portfolio (PWJ, news, msgs) powered ahead 5.4%, and iShares Emerging Markets Index Fund (EEM, news, msgs) spurted 7.4%.More from MSN Money
I forecast a rocky market when I last updated this portfolio in June, but the Fed's action clarifies the immediate future, and I'm expecting higher returns in the coming period than we got in the last. So I'm making a host of changes to the model.
Some are housekeeping, like switching one excellent fund for an even better one. But most are aimed at tilting the portfolio more toward large-cap growth stocks and high-quality bonds. I'm spending most of the cash I raised one quarter ago. Prices of small-cap stocks are a bit cheaper, and elsewhere prices are reasonable.
Here's how the model ETF portfolio finished the third quarter:
| Fund | Shares | Sept. 20 price | Value | % change | % of portfolio | |
|---|---|---|---|---|---|---|
PowerShares Dynamic Mid-Cap Growth Portfolio (PWJ, news, msgs) | 694 | $23.55 | $16,343.70 | 5.42% | 10.32% | |
102 | $152.28 | $15,532.56 | 0.63% | 9.81% | ||
207 | $72.70 | $15,048.90 | -3.09% | 9.51% | ||
83 | $129.38 | $10,738.54 | 5.21% | 6.78% | ||
94 | $82.38 | $7,743.72 | -0.18% | 4.89% | ||
334 | $80.35 | $26,836.90 | -0.91% | 16.95% | ||
58 | $143.10 | $8,299.80 | 7.43% | 5.24% | ||
198 | $43.85 | $8,682.30 | 12.09% | 5.48% | ||
142 | $109.73 | $15,581.66 | 1.42% | 9.84% | ||
84 | $92.38 | $7,759.92 | 0.35% | 4.90% | ||
$25,214.10 | 15.93% | |||||
Balance | $157,782 | |||||
Gain/Quarter | 1.80% | |||||
Gain/YTD | 10.85% |
The biggest disappointments were domestic small-cap and foreign developed-markets stocks, and that's where I'll begin tweaking the portfolio for the coming three months.
Growth spurt
I had already trimmed small caps to a minimalist position, and now I'm going to exchange Vanguard Small-Cap ETF (VB, news, msgs) for Vanguard Small-Cap Growth ETF (VBK, news, msgs). Growth is asserting itself across all capitalization and regional categories; the growth fund has done twice as well as the blended index so far this year. I will hold this position at 10% of assets.- Video: How to pick a mutual fund
iShares MSCI EAFE Index (EFA, news, msgs) has grown to 17% of assets. I'll let that weighting -- due entirely to outperformance -- run, but I'm exchanging this fund for iShares MSCI EAFE Growth (EFG, news, msgs). This fund is tilted more toward companies with consistent earnings than cyclical names, and the market is rewarding this focus; the growth portfolio is outperforming the middle-of-the-road index by 30%.
Despite the excellent performance of iShares Emerging Markets (EEM, news, msgs), I'm exchanging it for Vanguard Emerging Markets ETF (VWO, news, msgs). It tracks the same index but does it more cheaply, which means slightly higher returns for investors.
Continued: Expect growth in emerging markets
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