3 ETF Strategies to ‘Greek-Proof’ Your Money

by Susan J. Aluise | May 18, 2012 9:04 am

3 ETF Strategies to ‘Greek-Proof’ Your Money

It’s impossible to turn on the news anymore without hearing the latest alarming financial headlines emanating from Europe. As Greece edges ever closer to default — and fears rise that its plunge will take the euro into the abyss with it[1] — there’s plenty of gloom and doom to go around right now.

But despite the gathering storm on the market’s horizon, you can still “Greek-proof” your portfolio — and the right ETFs make that easier than ever.

Make no mistake, the situation in Greece is grim. In an alarming speech to U.K. business leaders on Thursday, British Prime Minister David Cameron said if EU leaders failed to fix the eurozone crisis fast, a Greek default could sink the euro and cripple the European banking system. So what’s the average investor to do against the backdrop of so great a crisis? Mohamed El-Erian, CEO of the global investment firm PIMCO, once offered this sage advice: “Investors have to ask themselves two questions,” he said. “How much can we grow our investments? And, can we afford our mistakes?”

El-Erian, who is co-investment manager of a portfolio with nearly $1.8 trillion in assets, probably knows a thing or two about managing investments during tough times. And answering those questions makes just as much sense for self-directed investors as it does for giant institutional portfolio managers — perhaps even more so. (Read El-Erian’s commentary on the Greek crisis here.[2])

Savvy investing in the face of the potential eurozone meltdown comes down to time-tested principles: Weigh growth opportunities against your risk threshold and investment time horizon. Diversification and liquidity are key — particularly now. If your portfolio is heavily tilted toward stocks (60%+), it’s a good idea to shift down into the 40% to 45% range for the short term as a hedge. Liquidity is an important consideration because you need to be agile if things go south fast.

Because exchange-traded funds are baskets of investments that often track a major index, they are by nature more diversified than individual stocks. They offer greater liquidity than mutual funds because they trade over a major exchange just like stocks — expenses also are usually lower. ETFs can be preferable to bonds because they require a smaller minimum investment.

With the odds growing that the mess in Greece will take the bloom off the U.S. economy and cause the market to slump, some ETFs are better bets than others are now. Here are 3 ETF strategies to Greek-proof your portfolio:

#1: Boycott Banks

One thing is clear now that JPMorgan Chase (NYSE:JPM[3]) CEO Jamie Dimon has been summoned to Capitol Hill next month to tell a Senate panel about the wild ride that lost his bank more than $2 billion[4]. This is not a good time to invest in banks with big exposure to eurozone debt. Instead, consider WisdomTree Dividend ex-Financials Fund (NYSE:DTN[5]) or PowerShares Dynamic Food & Beverage Portfolio (NYSE:PBJ[6]).

DTN excludes the financial sector, and top holdings are communications companies like AT&T (NYSE:T[7]) and Verizon (NYSE:VZ[8]); Philip Morris parent Altria (NYSE:MO[9]) and defense contractor Lockheed Martin (NYSE:LMT[10]). DTN has more than $1 billion in assets, yields 3.3% in dividends and charges 0.38% in expenses.

It’s hard to look at PBJ’s ticker without craving a peanut butter and jelly sandwich — and fittingly enough, this ETF cashes in on consumers’ food and beverage cravings. PBJ’s holdings include: Yum! Brands (NYSE:YUM[11]), McDonald’s (NYSE:MCD[12]), Kraft (NYSE:KFT[13]) and General Mills (NYSE:GIS[14]). With $157 million in assets, PBJ yields significantly less than DTN, at 1%, and charges more in expenses at 0.63%. However, Dynamic Food & Beverage has enjoyed 2% gains year-to-date vs. DTN’s 1% losses.

#2: Hedge Against Inflation

As serious as the eurozone debt situation is, it’s unlikely that Greece’s problems will drive domino-type defaults. Most governments — including the U.S. — are more likely to just print more money.

That makes hedging your portfolio against inflation an important strategy. Look at iShares Barclays US Treasury Inflation Protected Securities Fund (NYSE:TIP[15]) or iShares Barclays 1-3 Year Treasury Bond Fund (NYSE:SHY[16]).

TIP’s holdings are comprised with a mix of long, intermediate and short-term treasuries with interest rates ranging from a low of 0.625% to a high of 3.875%. TIP has $23 billion in assets, yields 3.3% and charges low, low expenses of 0.2%. SHY’s holdings are in short-term (1-3-year) U.S. Treasury Bonds — the largest share (11.3%) is in the 2/15/2014 bond at 1.25% interest. SHY has $11.2 billion in assets and yields less than 1% but undercuts TIP at 0.15% in fees.

#3: Don’t Dismiss Precious Metals

I know it sounds crazy given the fact that precious metals are in oversold territory right now, but it doesn’t change the fact that adding a little gold or silver to your portfolio is an effective hedge against a sagging euro. After a disappointing recent run, gold and silver rebounded Thursday[17] as the euro slid further.

Remembering the liquidity argument above, ETFs backed by physical precious metal holdings are a more convenient way to gain exposure without the hassle of owning the actual gold or silver. Consider iShares Gold Trust (NYSE:IAU[18]) or ETFS Physical Silver Shares (NYSE:SIVR[19]), both of which are backed by precious metal stores held in trust.

IAU has about $9 billion in assets and charges 0.25% in expenses — it has lost about 1.6% year-to-date. SIVR has about $500 million in assets and charges 0.3% in expenses, and also is down this year by about 2%.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.

Endnotes:
  1. take the euro into the abyss with it: http://investorplace.com/2012/05/the-euro-whats-done-is-done/
  2. Read El-Erian’s commentary on the Greek crisis here.: http://www.project-syndicate.org/commentary/who-is-responsible-for-the-greek-tragedy-
  3. JPM: http://studio-5.financialcontent.com/investplace/quote?Symbol=JPM
  4. lost his bank more than $2 billion: http://investorplace.com/2012/05/so-jamie-dimon-what-do-you-think-of-the-volcker-rule-now/
  5. DTN: http://studio-5.financialcontent.com/investplace/quote?Symbol=DTN
  6. PBJ: http://studio-5.financialcontent.com/investplace/quote?Symbol=PBJ
  7. T: http://studio-5.financialcontent.com/investplace/quote?Symbol=T
  8. VZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=VZ
  9. MO: http://studio-5.financialcontent.com/investplace/quote?Symbol=MO
  10. LMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=LMT
  11. YUM: http://studio-5.financialcontent.com/investplace/quote?Symbol=YUM
  12. MCD: http://studio-5.financialcontent.com/investplace/quote?Symbol=MCD
  13. KFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=KFT
  14. GIS: http://studio-5.financialcontent.com/investplace/quote?Symbol=GIS
  15. TIP: http://studio-5.financialcontent.com/investplace/quote?Symbol=TIP
  16. SHY: http://studio-5.financialcontent.com/investplace/quote?Symbol=SHY
  17. gold and silver rebounded Thursday: http://investorplace.com/2012/05/strong-rally-in-gold-silver-as-euro-weakens-further/
  18. IAU: http://studio-5.financialcontent.com/investplace/quote?Symbol=IAU
  19. SIVR: http://studio-5.financialcontent.com/investplace/quote?Symbol=SIVR

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