Those moves combined to overweight portfolios to larger-cap and growth-oriented stocks represented about a 5% shift of overall client assets, he added.

Heading into the new year, U.S. equities made up about 44% of the firm's all-asset core model portfolio. Another 16% went into international equities. Those included WisdomTree DEFA (NYSE: DWM) and the iShares MSCI EAFE Index (NYSE: EFA) to cover developed foreign markets. For developing countries, Arthur uses iShares MSCI Emerging Markets Index (NYSE: EEM).

Domestically, some 25% of Main's flagship all-asset model portfolio is devoted large-cap core ETFs. Another 5% is invested in the iShares Russell 2000 Index (NYSE: IWM).

Selling Options On ETFs

"We prefer to use core domestic ETFs with the best liquidity levels," said Arthur. "You can save 35 basis points or so with lower-priced funds from Vanguard and other providers. But an important part of our process is using an options overlay to our standard equities models."

Main prefers to sell options rather than buy them for a select number of core domestic equity ETFs. "Seventy percent of the time, options expire and turn out to be worthless. If you write that option, you get to keep that dollar rather than losing it," Arthur said.

He uses options to dampen volatility. "You get a yield enhancement from the underwriting. So it's like getting another income source to boost your overall portfolio's return," said Arthur.

Such an options strategy has been a big plus during the latest recession, he notes. And it continues to help cushion market bounces, says Arthur, even though market volatility has been cut in half from peak November 2008 levels.

"But on an absolute basis, volatility is still very much present and we expect to continue to see markets trade in very wide ranges," he added.

Main Management normally holds up to 25% of its portfolio in noncorrelated assets. These include everything from Treasury Inflation-Protected Securities to currencies, commodities and real estate.

"But in 2008, those investments have become more correlated with the broader market. So with the exception of TIPS, we have significantly reduced exposure to those alternative asset classes," said Arthur.

Dealing With Narrowing Correlations

While deflation is more of a short-term concern, he adds that in two years, inflation figures to be a bigger problem. As a result, Main is using some iShares Barclays TIPS Bond (NYSE: TIP) in client portfolios. "We're not adding to those positions, but unlike the other noncorrelated ETFs, we're certainly not selling any shares of TIP at this point," said Arthur.

The firm has completely gotten out of currencies. It still holds some exposure to real estate and commodities, however. Those ETFs and exchange-traded notes include the iPath Dow Jones-AIG Commodity Index ETN (NYSE: DJP), the PowerShares DB Commodity Index Tracking Fund (NYSE: DBC) and the Vanguard REIT Index ETF (NYSE: VNQ).

Noncorrelated assets are down to about 15% of total assets. The remaining 25% is currently in cash and fixed income. "We're generally remaining with shorter-duration bond funds and exclusively sticking to Treasuries," said Arthur.

Those include iShares Barclays 1-3 Year Treasury Bond (NYSE: SHY), iShares Barclays 7-10 Year Treasury (NYSE: IEF) and iShares Barclays 3-7 Year Treasury Bond (NYSE: IEI).

"Even though yields on Treasuries are really low right now, we're more concerned about safety. In our all-asset core model portfolio, we're using fixed-income allocations to dampen stock portfolio volatility," said Arthur.

-- This article was submitted by IndexUniverse's Murray Coleman. 

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