Edmund’s ETF/IT Portfolio Up 2.8% in 3 weeks

6th March 2014 by Edmund Shing

So Far, So Good…

If we look at the performance of our 6-member portfolio of UK-listed Exchange-Traded Funds (3 in total) and Investment Trusts (another 3) which I launched on Mindful Money on Friday February 10,

(Introducing Our new ETF, Investment Trust Model Portfolio)

I think we can say that it has been satisfactory so far, safely weathering the recent Ukrainian mini-storm (Figure 1).

1. ETF/IT Model Portfolio +2.8% Since Launch on Feb. 10

 Source: Author, Bloomberg

All six funds have made ground over the three weeks since launch despite the recent bout of Russian-Ukrainian inspired volatility, which for now at least seems to be calming down as Russia and the West both back away from anything that looks like military action or sanctions.

The benchmark index (comprised of one-third UK FTSE-All Share index and two-thirds MSCI World index in sterling, to match the geographic composition of the portfolio) has risen some 2.3% over the same period – so the portfolio has eked out a small measure of outperformance so far. But in any case, this is largely irrelevant as the portfolio is designed to perform over the medium-term (think years not weeks).

Small-Caps At the Head of the Market Advance

Judging from the performance of the various funds, it is clear that Small-Caps have led the way. This has been true in the UK, with the MSCI UK Small-Cap ETF (CUKS) gaining 5.6% thus far.

But it has equally been true both in Continental Europe as the EuroSTOXX Small-Cap index has broken to a new multi-year high today (as has the iShares Euro STOXX Small ETF – DJSC), and also in the US where the Russell 2000 small-cap index reached a new multi-year high just yesterday (the iShares US S&P SmallCap ETF mimicking this move – ISP6).

And Technology Still Looks Good

Elsewhere, US Technology marches ever higher, exemplified by the new highs seen in the Nasdaq 100 index today (you can get exposure to this index in the UK via the Powershares Global EQQQ ETF, code EQQQ). In the ETF/IT model portfolio, I expect the Herald investment trust (HRI) to benefit from the double whammy of strong UK small-cap momentum combined with strong upwards technology momentum as well.

But Stay Cautious, as the Risks have Not Disappeared

I will end on a short note of caution: while it seems that events in the Ukraine are settling down, this cannot be taken as read just yet. This fragile political situation still has the potential to cause further ripples in global financial markets, so I would not suggest that it is yet the time to try “bottom-fishing” in Emerging Markets funds or more specifically, in Russian funds such as the JPMorgan Russia investment trust (JRS).

2. JPMorgan Russia IT Has a Big Breakdown

Source: Bloomberg

The value angle in emerging markets and Russia in particular is very clear; however a contrarian investor swimming against the tide in the short-term must expect to suffer volatility and potential short-term reverses before profiting in the long-term. For my part, I think I will wait and observe from the sidelines for a little while longer, in case these cheap stock markets get even cheaper!

I am perhaps more tempted by the potential in Emerging Markets government bonds, given the heavy depreciation suffered by a number of emerging market currencies such as the Russian ruble over the past few weeks.

One option for an emerging markets sovereign bond fund which benefits both from the currency depreciation and also from the high yield currently on offer is the JPMorgan EM Local Government Bond ETF (SEML). This ETF yields 5.7% at present (equivalent to a junk bond fund) after its share price fell 28% from May 2013 peak to end-January 2014 trough, since when it has started to stabilise.

But it is perhaps too early to add this to the ETF/IT model portfolio – for now, I will sit on my hands and watch attentively instead!


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