The Aggressive Growth-At-All-Costs ETF Portfolio

Today, we're diving into the deep end of the investment pool with a look at some of the most volatile non-leveraged ETFs available and seeing how they can work to together.

Designed for aggressive growth, this ETF portfolio is tailored for those who prioritize capital appreciation over income or capital preservation. Most of the assets selected are known for their high beta, meaning they're significantly more sensitive to market movements than your average investment.

While I typically steer clear of such high-risk strategies, I recognize that many younger investors, particularly from Gen Z, are drawn to these bold moves.

Instead of watching them dive headlong into risky options trading or leveraged ETFs, I've put together a more structured approach to aggressive growth investing. This portfolio isn't for the faint of heart, but it offers a more sustainable path for those determined to chase substantial capital gains.

The equity allocation

For the equity portion of our aggressive growth ETF portfolio, I've selected the Invesco NASDAQ 100 ETF (QQQM). Despite my reservations about its core methodology—limiting its holdings to Nasdaq-listed stocks doesn't seem to have an economic basis—the ETF's performance history speaks volumes.

QQQM is a large-cap growth fund, heavily skewed towards the tech sector, with significant holdings in leading companies like Microsoft, Alphabet, Amazon, Tesla, Meta Platforms, and Nvidia. It's a powerhouse of consumer discretionary and communication stocks, making it a staple in growth-oriented portfolios.

What draws me to QQQM? It epitomizes cost-effective exposure to market trends—boasting a low expense ratio of just 0.15%. With a historical five-year beta of 1.18, it's more volatile than the broader market, which can be a double-edged sword: fantastic in bull markets but a riskier bet during downturns.

The bond allocation

You might be surprised to see bonds in an aggressive growth portfolio but let me clarify: not all bond ETFs are created equal.

Particularly, those focusing on long-duration bonds carry a significant amount of interest rate risk, which can either make or break their performance depending on the economic climate. For example, long-duration bonds performed exceptionally during rate drops like in March 2020 but suffered in 2022 when inflation prompted rate hikes.

Among the most sensitive to these fluctuations are STRIPS—Separate Trading of Registered Interest and Principal of Securities. These are bonds that have had their principal and interest payments separated, making them highly responsive to changes in interest rates due to their lack of regular coupon payments.

While volatile, STRIPS tend to move independently from stocks, providing a potential hedge in a diversified portfolio. When rebalanced properly, they can improve your overall risk-adjusted returns despite their own higher risk profile.

For our aggressive growth portfolio, I've chosen the Vanguard Extended Duration Treasury ETF (EDV). This ETF has an ultra-long average duration of 24.3 years and a low expense ratio of 0.06%. With such a long duration, EDV's price is extremely sensitive to interest rate changes.

For instance, if rates rise or fall by 1 percentage point, you can expect EDV to move by around 24.3% in the opposite direction of the rate change, all else being equal.

The alternative allocation

When both stocks and bonds take a hit simultaneously, like they did in 2022, the correlation benefits typically expected from diversifying between these assets can disappear.

This calls for an alternative investment that remains uncorrelated to both during various market conditions, doesn't carry credit or market risk, resists inflation, and historically acts as a safe haven during downturns—all while maintaining sufficient liquidity.

Gold fits this unique profile perfectly. In times of turmoil, investors often flock to gold as a "flight to safety," which can help stabilize a portfolio when other assets are declining. For our aggressive growth portfolio, I recommend incorporating a gold ETF to provide this balance and hedge.

The SPDR Gold MiniShares Trust (GLDM) is an excellent choice. It offers all the benefits of investing in physical gold without the need to manage the actual commodities at a low 0.10% expense ratio.

Putting it together

In the span from December 13, 2007, to October 10, 2024, an aggressive growth portfolio comprising 70% QQQM, 20% EDV, and 10% GLD achieved a compound annual growth rate (CAGR) of 13.33%. This compares favorably to the 10.47% CAGR of the SPDR S&P 500 ETF (SPY).

The diversified nature of this portfolio also provided better risk management: it experienced a maximum drawdown of 34.65%—significantly lower than SPY’s 54.56%. Furthermore, the portfolio's standard deviation, a measure of volatility, was only 15.03%, compared to 20.04% for the S&P 500. This resulted in a higher risk-adjusted return, with a Sharpe ratio of 0.84 compared to SPY's 0.54.

This example illustrates the benefits of diversification. While investing solely in high-growth areas like tech through QQQ may seem appealing, incorporating volatile yet non-correlated assets like long-duration Treasuries and gold can enhance returns while managing risk more effectively.

This approach effectively demonstrates that diversification can be akin to getting a 'free lunch' in the investment world, where adding the right mix of assets improves returns for each unit of risk taken.