ETFInvestor has a post up that details an optimized ETF portfolio put together by Geoff Considine using Monte Carlo Simulation. Geoff's idea is a spin on David Jackson's portfolio, the zeros in the breakdown are ETFs that David included but Geoff did not. Here's the breakdown;
IVV 8%
IJH 5%
IWM 10%
EFA 20%
EEM 0%
SHY 0%
IEF 15%
TLT 15%
RWR 10%
IDU 10%
IXC 10%
IGE 10%
I'll toss up my usual disclaimer that all portfolios like this have flaws. Anything along these lines that I might try would have flaws too. Flaws themselves don't have to be a problem but not knowing what they are could be. I realize the portfolio adds up to more than 100%. I don't know why that is but I just pasted this from ETFInvestor.
The energy weight is colossal at 26.96% (all of these numbers are from Morningstar) compared to 10.29% in the S+P 500, utilities have a 13.76 weight compared to 3.6% in the S+P 500. Tech is very underweight vs the market. The yield is 2.41% which is above the market yield but not that high when you consider that 30% is in bonds and 10% is in REITs.
I am as bullish on energy as anyone, I think, but there is no way I would overweight it by 16 percentage points, not even close. I think there are fundamental drivers for energy so I am overweight. I don't think there are necessarily any fundamental drivers for utilities to outperform the market again, tripling up on the benchmark weight is very extreme. I am very close to equal weight (just a hair over) utilities because I want the yield but I do not think the sector will beat the market by the roughly 8% it did in 2005.
I would also note that the median cap size of the portfolio is $14 billion. That is fairly small. Small could continue to lead but it is worth knowing that the run of large cap lag is very long in the tooth by historical standards.
The other thing is no emerging market exposure, I don't think EFA really have enough to matter. I have not paired back my exposure for clients but it is possible that pairing back is the right trade ( to be clear I don't think it is but I could be wrong). Almost ignoring an asset class could be a big mistake, at least it is today.
I am quite sure that all of the things I pointed out are easily justified by Mr. Considine but this is just how I see the portfolio.
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1 comments:
I think the idea behind 100 plus percent is to use a little leverage to boost beta while holding a few low betas that can be sacrificial pawns if necessary. It is sometimes psychologically easier for folks to swap out of a small loss to add beta than to buy on leverage when the account is down. Ergo, buy the leverage first; an honest way to cheat a little.
As you know, I am, right or wrong, dramatically under-weight energy. I believe energy earnings will be strong but not strong enough to boost the stocks a lot.
In regard to emerging markets, my word of caution is that emerging markets tend to do very well in the years after a tough recession while developed markets tend to do better in the latter years of economic cycles. I don't have the r square handy, but a great example is the very low correlation between Japan and emerging markets. If you are aware of the long-term, huge base in Japan and the huge break-out, you might appreciate the idea of over-weighting developed international and under-weighting emerging markets.
Another r square to consider is the strong relationship between real estate and emerging markets and the weak relationship between Japan and real estate. My take is that Japan will beat real estate and emerging markets in 2006.
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