Terry Tanaka says the BFIA ETF portfolio is performing reasonably well. Now, though, one underperformer needs to go, and some of the surplus cash should be put to work.
We last revised the BFIA ETF portfolio in July, adding WisdomTree True Emerging Markets (LSE: WEMP). The new holding offset the increasing technology bias in our long-held iShares Core MSCI Emerging Markets (LSE: EMIM) position.
Emerging markets now account for 15% of the portfolio. That may sound like a large allocation, but Korea and Taiwan make up roughly half of EMIM, and their markets have become so tied to the AI investment cycle that the usual emerging-market framework no longer fits them well. In practice, the exposure breaks down into about 10% in broader emerging markets and 5% with heavy sensitivity to AI capital spending. That distinction matters if the AI boom fades and we decide to reduce the position.
Since then, geopolitics and financial markets - particularly bonds - have been volatile. The portfolio has felt relatively little of that turbulence because we had already taken a cautious position. Our bonds, for instance, mature soon; we held them that way because we worried that longer-term yields could break loose.
That said, our real-estate holding, Xtrackers FTSE Developed Europe Real Estate (LSE: XDER), is still under pressure. Over the medium term, expensive energy, persistent inflation, and higher interest rates could weigh on confidence and slow the broader recovery. For property companies, the squeeze is more direct: refinancing costs rise while valuations fall. Rates started moving up from the floor four years ago, yet investors still appear uneasy whenever they are reminded that current levels may become the new normal.
What we're changing in the BFIA ETF portfolio
European real estate still looks valuable to me. The takeover activity - particularly in the UK - suggests that trade buyers are finding opportunities the public markets have missed. We cannot say when investor sentiment will turn, though. Rather than abandon the sector, we plan to reduce its allocation from 10% to 5% while we watch developments. That change also fits the wider portfolio: taken together, its holdings sit at the upper end of medium risk, and a more cautious stance may now be sensible.
IShares Global Infrastructure (LSE: INFR) is worth considering. There is plenty happening in what was once a sleepy sector (see issue 1320), although the fund has also fallen as long-term bond yields have climbed. For now, iShares £ TIPS 0-5 GBP Hedged (LSE: TI5G) looks more appealing: its underlying bonds offer a 2.8% real yield while carrying limited interest-rate risk, just as the threat of higher inflation grows. We will therefore move 5% from XDER and the other 5% from our uninvested cash into TI5G, raising its total allocation to 20%.
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