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March 26, 2012

Global X Goes ‘Permanent’

Of all the investment strategy funds that have recently debuted, it was just a matter of time before the ETF industry would launch a “Permanent Portfolio” fund. In February, New York-based Global X Funds introduced the Global X Permanent ETF (PERM). The new fund is linked to the Solactive Permanent Index, which assigns 25% market exposure each to four asset classes: stocks, gold, silver and U.S. Treasury Bonds. Within the fund’s stock allocation, it also includes around 5% exposure to REITs. The underlying index is rebalanced annually back to its 25% target allocation.

The “Permanent Portfolio” was developed by free-market investment analyst Harry Browne in the 1980s. Browne, who also ran for president as a Libertarian Party candidate, 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.

Instead of holding physical precious metals, PERM holds exchange-traded products linked to precious metals futures contracts traded on the London Stock Exchange.

PERM mostly uses a fund of funds strategy but with certain exceptions. For example, with large cap (VV) and small cap (IWM) U.S. stocks, PERM owns a basket of individually selected stocks rather than broad index ETFs targeting these areas.

In the mutual fund market, the Permanent Portfolio mutual fund (PRPFX) was launched in 1982 using Browne’s ideas as the basis for an investment strategy.

Despite lagging the S&P 500 index since its inception, the Permanent Portfolio mutual fund has produced an after tax gain of 9.63% over the past ten years compared to a gain of just 2.92% for the S&P 500. Today, the San Francisco area fund is managed by Michael Cuggino, a certified public accountant by training.

At the end of 2011, PRPFX had 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.

The Permanent Portfolio Mutual Fund charges higher annual expenses of 0.77% compared to the Permanent Portfolio ETF, which charges just 0.48%.

ETFguide.com evaluated the Permanent Portfolio strategy and estimated the annual operating cost of an all ETF portfolio following a similar investment mix would cost around 0.30%.

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