Back to Chapter 1

Now it is time to take the plunge with My ETF Portfolio as a demonstration of how our “System” works. Over the coming weeks, I will narrate and trade as the “System” suggests and report the results in this series of articles. My aim to show you how to use this (or a similar) system to streamline your asset selection and allocation process. The goal is to achieve solid investment returns in an efficient, unemotional manner.

As you can see in the first article, we have set up a universe of “asset classes” which is represented by 20 fairly liquid ETFs.

Important note: this is my portfolio. It represents my interests, prejudices, biases, risk tolerances, hopes and investment time scale. Your criteria will be different, which is why I would expect your 20 ETFs to be different. But, that is as it should be. And, if you would like to share your ideas, please feel free to add to the comments or, as some of you have done, send me an email.

In our second article, we have outlined the “rules of the game” so that one can follow the narrative in a fairly transparent manner. We will let the market generate all the plot twists and other surprises.

The rules can be summarized as:

  1. Starting Capital: US$30,000
  2. Trading Discipline: Own as equal a weighting as practical of the top three ranked ETFs as ranked on Friday close; trades to be executed on the following trading day close (usually Monday) through my online broker.
  3. Disclosure: Ranking results before Monday open; Investment results at the bottom of posts as available.

Initial Ranking of Seeking Alpha Portfolio

So, let us begin. Here is the Friday, November 12th 2010 ranking for “My ETF Portfolio”.

Our portfolio starts with Turkey, Hong Kong and Indian Equities in the top three positions. That means I will seek to buy 370 shares of EPI, 500 shares of EWH and 130 shares of TUR. I expect to end up with some cash left over. I will give exact details of the transactions in the next post along with the updated ranking.

That was easy, now what?

As I hinted in previous posts, I am going to set up a little “soapbox” each week and talk about the reasons I have chosen one of these 20 ETFs for my investment universe.

Since there are several India discussions running on the Seeking Alpha website (one example) and the Economist has just completed a special report on Turkey, I will start my “Why did I pick this ETF” series with EWH, the MSCI Hong Kong ETF.

EWH: Why Hong Kong?

Hong Kong, to me, is the “oil pan” of the Greater China economic regional “engine.” The Greater China region definitely includes China, Taiwan, Hong Kong and Macau. But it also includes bits of South Korea and small slices of Thailand, Malaysia, Singapore and the Philippines as well. If we think of China as the “engine” of all this economic activity, Hong Kong is firmly attached at the bottom providing critical “lubrication” for the engine. As the oil reservoir, it is the place where all the oil eventually returns and rests when not being used.

iShares maintains a pretty good information page on EWH where one can find a breakdown of the stocks inside. There you can see that the ETF, like the stock market and the economy, is dominated by property and finance (over 60%). When you “Buy Hong Kong”, you are getting an economy where trade makes up over 40% of GDP.

Although the British handed back Hong Kong in 1997, the Special Administrative Region (SAR) maintains a full range of British civil, criminal and contract law as well as a currency “pegged” to the US dollar. As a result, the broad majority of China’s Foreign Direct Investment, legal work, trade finance, insurance and logistics services are provided out of or at least in connection with Hong Kong. A significant portion of the profits that are made in the “Greater China Trade” are kept or controlled in Hong Kong and, due to its very liquid property market, luxury flats (apartments) are often used as “stores of wealth” for wealthy business people both in China and around the region. Not only can flats be sold reasonably quickly in Hong Kong, they are always welcomed as collateral for a quick loan if an exciting investment opportunity arises.

So, with a bumper harvest of US dollars, interest rates held low by the Bernanke Fed (remember the currency “peg”) and Chinese business people keen to recycle their earnings through the SAR, asset prices are soaring and financial institutions are quietly moving money around and charging handsomely for the privilege.

EWH is a “follow the money” momentum type of investment for me. If the money flows are favorable for Hong Kong, this ETF should do well. When fortunes change north of the border (and they will from time to time) then you can expect Hong Kong (and EWH) to follow in short order.

So, why did I include EWH? Because, when China is running and money is flowing, I want to participate on the upside through the bankers, lawyers, shippers and real estate agents to the Chinese. Another way to “Buy what the Chinese buy, sell what the Chinese sell1” is to participate through Australian, Canadian, Chilean, or Brazilian equities. In this portfolio, I pick up some of that spirit by including the Australian Dollar (FXA) and a general Brazilian equity ETF (EWZ) in my universe of 20 ETFs.

I want to thank everyone for taking time to make comments. One of my ulterior motives for doing this series is to get feedback so that I can further improve my investment “System”.

Disclosure: I am long EWH, TUR and EPI in this portfolio. I am also long DBA in another portfolio. I will be trading the ETFs mentioned in these posts according to the rules mentioned above and in the second article of this series.

1 A strategy which is so old, I can’t remember who came up with it first.