The above is deliberately misspelled.
My day was all planned. Get some work done and watch a little baseball on the free-view of the Extra Innings package from Directv.
I have had eleven phone calls including calls from friends, neighbors and reporters. Our satellite internet went out twice because of the snow storm we had earlier today (this means I have to go out an gently clean the dish). I helped proof-read a grant request for our fire department that is due tonight. I am just now catching up but I fell all bunched up.
There, I feel better.
The blog had some good chatter from John Christy and frequent reader petronius (BTW, John did you know the story of Petronius or did you look it up?)
John makes an interesting point about too much diversification by owning 900 stocks in an all-ETF portfolio. Being over diversified is not good. Occasionally I will read about an actively managed OEF with several hundred names in it. I think that is clearly a case of over diversification.
What about a portfolio with two ETFs comprised of iShares Dow Jones Total Market (IVV) and iShares Emerging Markets (EEM). IVV has 1623 holdings and per John's comment EEM has 261 holdings. With these two ETFs you either have 1900 stocks or two often divergent effects.
The portfolio that petronius put out (that originally came from me, I have to admit I don't remember posting it) owned RSP, DVY, PID and an emerging fund. I'm sure I disclosed that I did not have the portfolio for any one client nor would it be my first choice to implement personally or for a client.
That being said, the notion of improper construction of ETF portfolios and improper use of ETFs is worthwhile to explore. Clients own a handful of ETFs in what are mostly stock portfolios. None of the ETFs I use are broad-based, they all capture a narrow theme like water or a sector.
Smaller accounts do own sector ETFs, which I have outlined in previous posts. John might believe that this is improper use of ETFs and if so probably sound compelling which is OK. As you manage your own portfolio you can only own what you are comfortable (vague and subjective on purpose) with. Your portfolio will have flaws, my portfolios have flaws, that is just how it is. The extent to which you can minimize the flaws will contribute to your success.
I have about 15%-17% in the financial sector spread over five or six stocks. Also included in the 15%-17% would the sector exposure in whatever products the client may own. I'm not going to buy six financial stocks for someone with $150,000 portfolio. That person might have IYF, one Aussie bank and the Irish bank that everyone owns, as an example.
I'm sure someone could come up with what think is a better way to skin that cat and perhaps they could but this is the best way I can think of to try to manage accounts.
Thanks for all the great comments.
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11 comments:
I hear a lot about preferences for or against ETFs and mutual funds. Me, I strike a balance. If I find a mutual fund that consistently out performs ETFs, I choose that. If not, I use the ETF.
Here is my current portfolio:
Domestic
Large Cap (SPY) 12%
Small Cap (BUFSX) 7%
Midcap (MDY) 7%
Financial (XLF) 8%
Healthcare (VGHCX) 7%
Technology (QQQQ) 13%
Energy (PSPFX) 7%
Bond (LSBDX) 10%
International
Latin America (ILF) 8%
Asia (MAPTX) 8%
Europe/Japan (QFVOX) 8%
Bond (Global)(LSGLX) 2%
Bond (PEMDX) 2%
(emerging mkt bond)
Cash 10%
Once a year I evaluate the performance of my ETFs and mutual funds to find replacements, if necessary. My search criteria is simple - I first look for mutual funds that have outperformed their peers for the past 1,3, 5 and if possible 10 years. I then compare this mutual fund with ETFs. If the performance is "much" better, I choose the mutual fund, else the ETF. While choosing mutual funds, I naturally look at the standard stuff - no load, reasonable management fee, acceptable turnover, alpha, manager tenure, etc.
On the domestic allocation, I have special allocations for financial and healthcare because historically they have consistently out performed the S&P. I use the QQQQ's because I am a believer in technology as a driving force. If I find an alternative to QQQQ which is more strictly focused and technology AND performs better, I would use that.
I am not a stock picker so I leave tha to the pros. And, rather than stuff my portfolio with just ETFs or mutual funds, I pick and choose the best of both worlds.
Oh and BTW, I use up to 2% of my cash for speculative trading - options, mostly.
so what you're saying is you use what you think is the best tool to capture certain effects.
perfect.
This is what I have been saying all along. We could find flaws in Jey's portfolio, mine and yours.
Great comment!
Seems like people are making this way too difficult. Use Yahoo's ETF center.
VTI has a slightly higher alpha and a lower expense ratio than other fund families.
Toss in a bond fund and/or an energy fund, TLT and XLE.
The main thing is to find ETF's/funds that are negatively correlated.
Rebalance once a year if taxable. In non taxable accounts, I guess you could do it when one account is 10% over the target weighting, keeping in mind that you want to keep commissions down.
Worth reading : The Intelligent Asset Allocator.
Michael
too diffiuclt?
this is worthwhile. i agree with this in that someone can make their portfolio is simple or as complex as can be imagined.
I think of my portfolios as simple. Someone else may think the way I do it is tto simple or too complex. Either opinion is fair.
I see Jey's portfolio and think it is not too difficult but then again I spend 75 hours (my wife's count) a week minding the store. Most people don't want to make their portfolio a full time job.
If you go thru most of those picks, MDY, QQQQ, ILF, and XLF, their correlation with the S&P 500 are 81%, 76%, 53%, and 64%. EFA is 99%.
Surprising, isn't it? Might as well own SPY and be done with it in most cases.
If the gentleman wishes to get some true diversity, XLE has an R squared of 11%. EWJ is 29% while little Malaysia (EWM) is 18%.
re:bonds. I'd look to add a US bond fund like RYGBX and look to switch between the funds he chose. I looked at LQD and it appears that it's time to switch to govt bonds. JMO.
Michael
Is there a website where you can obtain that kind of information - i.e., the historic correlation of individual stocks and etfs to the S&P500?
Is there a website where you can obtain that kind of information - i.e., the historic correlation of individual stocks and etfs to the S&P500?
go to Yahoo Finance, click on ETF tab, enter the ETF, and click on "risk". Shows 3 year R squared which is the correlation to SP 500. Also can look at Alpha. Use Google to look up the terms.
Michael
Roger,
I think the key to good investment is to think for yourself after listening to the myriad of sage advice, market noise and sell side propaganda and create your own portfolio. Unlike the gimmicks on CNBC and the rest of the biased media, the blogs do a great job at enforcing this point.
And yes, my portfolio is simple - takes about 5 hours a year to maintain and reshuffle. And yes, there is no such thing as "THE PERFECT" portfolio, only "MY PERFECT" portfolio.
BTW Roger, could you share your current portfolio allocation with us? Not specific stocks/fund names (although should you choose to share those, that would be perfectly okay), but just % allocations? Pardon me if you have already done this elsewhere on the site.
Michael,
I am happy with my choice of mutual funds. They have handily outperformed their ETF counterparts.
Not that my choices always work well. Three years ago, I swapped SCGEX (Scudder Greater Europe Growth) for QFVOX (Quant Foreign Value) and recently, I swapped SLAFX (Scudder Latin America) for ILF.
Re alphas and r2, a correlation of less than 75% is significant enough for me to hold positions in MDY and XLF. Re EWJ (Japan) and EWM (Malasia), I do not monitor my portfolio and indeed world markets closely enough to have positions in single country ETFs just for the sake of establishing a lower r2. However, that does makes a good case for owning actively managed international mutual funds vs. ETFs. Let the manager worry about allocations.
Bottom line [for me] - use mutual funds when available, ETFs if not. No matter what you choose, there will be overlap and issues with alpha, beta, r2 and what have you.
Hey Roger,
With higher rates, slowing economy, debt ridden consumers, rising oil/commodity prices (more inflation), wars on two (soon to be three?) fronts, deficits galore and George, who obviously can't balance his own check book just spending away ----- makes me a tad nervous about the market. Of course, from a contrarian view point we could just keep climbing "the wall of worry" and head higher...........but with rates where they are, I am thinking of getting a CD.
I came across this non FDIC insured product. While I wait for them to mail me a prospectus, I wanted to see if you would invest in a product like this and if not, why? After all, my brokerage MM isn't FDIC insured either.
http://www.mlnbank.com/prem_cds.html
What is wrong with broadly diversified ETF? I do not own one currently but I do own some vanguard total stock market index mutual fund which I view as essentially the same product.
I do not get the complaint broad diversification, low cost, out performs most mutual funds over the long term. Yes I also have 2/3 of my investments abroad, but I simply can not see a reasonable objection to broad market exposure with low expenses.
KL
Re; ETF's versus Mutual Funds et. al.
State Street Advisors had an interesting paper on "Using ETF's to Optimize Risk/Return within an Asset Allocation Framework" by Agustin J. Fleites. I printed it off some time ago, but I can no longer find it on their site.
One example given was,
If you had a portfolio of say:
30% US Bonds
20% Large Cap Growth
20% Large Cap Value
15% Small Cap Core
15% International Equities
You would use the cheapest broad index ETF's for the first three, and use Mutual Funds, Managed Accounts or Individual Stocks for the last two. The idea being that knowledge and experience are more likely to be an advantage in the last two classes, but offer little advantage in the first three classes.
OG
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