After a slight correction in mid-August, equity markets shined in the third quarter, as investors came to grips with what appears to be an inevitable second round of quantitative easing by global central banks. Over the three-month period, the MSCI EAFE Index–which excludes the US and Canadian markets–gained 16.14 percent; the S&P 500 rose 11.29 percent.

By comparison, our Global ETF Profits portfolio returned 9.41 percent, underperforming both benchmarks in third quarter. But it’s not an entirely fair comparison. Both benchmarks are long-only equity indexes, while we take a total return approach to managing our portfolio, which includes positions in both bonds and precious metals.

While our approach may underperform equity-only benchmarks over short time periods, we expect our total return approach to generate superior long-term returns. The past six months have vindicated our strategy. Since inception, our portfolio has returned 8.57 percent compared to a 3.18 percent gain for the MSCI EAFE index and a 1.05 percent gain for the S&P 500.

Our portfolio’s income component was a major reason for that outperformance–our portfolio currently yields 1.92 percent, assuming equal dollar positions in each of our recommendations. Furthermore, the volatility-muting effects of bonds and gold allowed our portfolio to hold a greater portion of our gains during drawdown periods than would have been possible with a long-only equity portfolio.

The growth portion of our portfolio has returned just 0.33 percent while generating high volatility compared to either index as measured by beta. Our growth portfolio’s beta relative to the S&P 500 was 1.2, and relative to the MSCI EAFE Index it was 1.05. The addition of our Income & Hedges Portfolio dampened those swings, bringing beta relative to the S&P 500 down to 0.93 and 0.82 when compared to the MSCI EAFE Index.

Portfolio Moves

Ideally, our subscribers would follow our model portfolio as we’ve constructed it. But we realize that most of you will pick and choose funds that are appropriate for your financial situation. In order to assist those of you who are cherry-picking our portfolio, we list our picks in order of preference, beginning with our current favorite exchange-traded fund (ETF).

While Yiannis makes the case for our bullish stance on US equities in our feature article, we are adding Rydex S&P Equal Weight ETF (NYSE: RSP) to our Growth Portfolio in the third slot. iShares MSCI BRIC Index (NYSE: BKF) and SPDR S&P International Dividend (NYSE: DWX) remain in the first and second slots, respectively. We expect US stocks to perform well in the fourth quarter as QE II gets underway and cash on corporate books portend future dividend boosts. But we still believe that emerging markets offer the greatest growth potential.

We’re moving Market Vectors Nuclear Energy (NYSE: NLR) up in our order of preference based on our expectations for the mid-term Congressional elections, the results of which will be in before our November issue is published. We generally steer clear of ideological debates, but the current polling data suggests that Republican candidates have the advantage in a number of districts across the country, including several that have historically been considered safe Democrat seats.

Should Republicans take control of at least the House of Representatives, it’s safe to assume that we’ll see nuclear energy play a starring role in any energy policy crafted by Congress. When Senators John Kerry (D-Massachusetts), Lindsey Graham (R-South Carolina) and Joseph Lieberman (I-Connecticut) were drafting their energy bill, major provisions supporting nuclear power were included at the behest of key Republicans. While the bill ultimately failed, it did demonstrate Republican leanings on the issue.

Finally, after a nice run in the markets we’re bumping up a few of our price targets to accommodate relative upside strength and our generally optimistic view toward equity markets in the fourth quarter:

• iShares MSCI BRIC Index (NYSE: BKF) is a buy up to 55.
• SPDR S&P International Dividend (NYSE: DWX) is a buy up to 58.
• Guggenheim China Real Estate (NYSE: TAO) is a buy up to 24.
• Market Vectors Agribusiness (NYSE: MOO) is a buy up to 53.
• iShares S&P Global Technology (NYSE: IXN) is a buy up to 60.
• iShares MSCI South Korea Index (NYSE: EWY) is a buy up to 58.