But the S&P 500 failed to accommodate the bears when it fell 15.1 percent in the quarter before finally rebounding in early October. Meanwhile, the MSCI EAFE Index–which tracks the performance of global equity markets–narrowly avoided entering a new bear market with a decline of 19.4 percent. By comparison, our Global ETF Profits Model Portfolio declined by 15.6 percent in the quarter, for a loss of 8.9 percent year to date.

This crisis of confidence has taken its greatest toll on the energy sector, which declined by more than 20 percent in the third quarter. The Model Portfolio’s exposure to this sector has been the largest drag on its performance. Nevertheless, we’re maintaining our exposure to the energy sector because our long-term view of the sector remains unchanged.

Fundamentals Intact

In managing our Growth Portfolio, we survey the world for broad macroeconomic trends, which inform our investment decision-making. Once we decide to commit to a purchase, we do so with conviction. We take a long-term perspective toward investing, so we hope to hold a security for at least three years following its initial purchase. As long as our long-term thesis remains intact, we’re willing to endure the market’s short-term volatility.

Our Model Portfolio’s exposure to the energy sector is a perfect example of that.

The European sovereign debt crisis has put a serious damper on energy demand. If the situation were to spiral out of control, nations such as Greece, Spain, Ireland or Italy could default, which would decimate the European banking system and plunge the world into a deep recession.

We believe the Europeans will eventually work to resolve this crisis, and we’re finally seeing signs of such effort. France and Germany have agreed to work together to formulate a plan to recapitalize troubled banks, a critical first step in unwinding the region’s debt crisis. While the two major European powers aren’t the sole decision makers and the path to resolution will be bumpy–Slovakia’s recent failure to back the plan for an expanded role for the European Financial Stability Facility is an excellent example of that–Europe’s problems will be resolved and the European Union will emerge intact. The consequences of a failure to act would simply be too dire for the Continent to allow a cascade of defaults to unfold.

So we continue to believe that energy will remain in a bullish secular trend, and data from the US Energy Information Administration (EIA) supports our view.

Source: EIA

The chart above depicts the EIA’s forecast for global energy demand through 2035. It’s an excellent visual representation of the fact that energy demand growth will largely be driven by emerging market demand. The bottom red bar represents demand forecasts from the member states of the Organization for Economic Cooperation and Development (OECD), an organization primarily comprised of developed-market states. While the OECD member states forecast slight growth in energy–about 50 quadrillion British thermal units (btu) over the next two decades–the vast majority of growth will come from the non-OECD states in the emerging markets. In fact, energy demand from those countries is projected to grow by more than 220 quadrillion btu by 2035.

That’s a trend that can’t be ignored.

King Coal

Market Vectors Coal ETF (NYSE: KOL) declined by a little more than 36 percent in the third quarter, making it one of the worst performing positions in the Growth Portfolio.

Concerns about future Chinese growth largely fueled the sharp decline in coal over the course of the quarter. According to estimates, China produced roughly 3 billion tons of coal last year, but it consumed around 3.3 billion tons, making it both a major producer and importer. Coal accounts for about 83 percent of the country’s energy consumption. Given that China is one of the world’s largest consumers of coal, many believe that as China goes, so goes coal.

There’s certainly some truth to that, if for no other reason than perception often becomes reality in the market. However, the growth in coal consumption is hardly limited to China. China contributes a great deal to the demand curve, but aggregate demand from other emerging markets accounts for the majority of demand.

The graph below shows the EIA’s estimates for energy consumption based on fuel type. While liquids such as oil account for the bulk of energy consumption due to transportation demand, demand for coal is expected to grow at the fastest rate of any energy source.

Although global economic activity has undeniably slowed over the past couple of quarters, consensus analyst expectations still forecast emerging market GDP to grow by more than 6 percent this year and next. And that forecast even accounts for a slight slowdown in China. An abundant source of inexpensive energy such as coal is needed to fuel that rapid growth. So coal will remain the energy source of choice for emerging markets.

Even if the developed world were to slip into another recession–again, a scenario we consider unlikely–coal demand will likely remain stable. At the height of the recession in 2008, for example, global coal demand still rose by 4.2 percent.

Despite the drubbing we’ve taken on this position, Market Vectors Coal remains a buy under 52 based on our thesis for long-term growth in coal demand.

The Global ETF Profits Way

As a reminder, the Global ETF Profits Model Portfolio is divided into three sections: Growth, Income & Hedges (I&H) and Short-Term Opportunities.

The Model Portfolio provides the full spectrum of strategic approaches to investing by recommending growth, income, and hedging strategies, as well as shorter-term tactical opportunities. Additionally, the use of exchange-traded funds (ETF) can capitalize on trends in specific sectors without incurring the risk of selecting the wrong stocks in those sectors.

The Growth and I&H Portfolios are appropriate starting points for investors seeking to establish positions for the long term. The Short-Term Opportunities Portfolio is suited for those investors who have a greater tolerance for risk. We’ll adjust the ETFs in the overall Model Portfolio on an ongoing basis to reflect investment objectives. Our recommendations are sorted in descending order of preference, starting with our favorite pick at the top of each section.

It’s important to buy a cross-section of recommendations–taking into account, of course, your objectives and risk tolerance–in order to gain broad exposure to the investment themes we’ve highlighted, as well as to maintain proper diversification.