Their comment was felt that Geoff's article used data mining to make its point and they note their belief that "ETFs may offer the best available option for efficient asset allocation without negative-alpha risk and with low expenses."
The XTF website shows the composition of three different all-ETF portfolios. I guess the product is new because the results provided are back tested.
The portfolio I looked at is called Tack 80 and was comprised as follows on March 31;
Large Cap SPY 36%
Mid Cap VO 20.40%
Small Cap IWM 12%
Foreign EFA 27.6%
REITs VNQ 1.65%
Short Term Bonds SHY 0.30%
Intermediate Bonds IEF 0.30%
Long Term Bonds TLT 0.45%
Corporate Bonds AGG 0.30
Cash 1%I don't know how it has done since 3/31 nor did I even count if it adds up to 100%. Whatever the strategy is here the back test numbers are very good, they soundly beat the S&P 500 for the last five years. I did not read enough to get a feel for their process but the back test shows it can be done with just ETFs.
It does seem like there are many parts of the market missed with such a narrow selection. XTF is not wrong but the approach is not right for me. Is such a narrow list right for you is what is important. I have written countless times about my belief of tying in numerous themes to make a diversified portfolio. I think it makes the ride smoother and the job easier.
I have had help with returns from some fairly narrow things. In the second quarter of 2005 Statoil (long time holding) went from $14 to $21 in about ten minutes (intentional hyperbole). This happens a fair bit where some country or forgotten sector adds a lot to the portfolio. This element is clearly not going to happen in the above portfolio. A narrow theme like Norway does not have enough weight in EFA to matter.
Again this is about different mousetraps not right and wrong. Only time will tell whether the actual returns will measure up to the back test but you have many schools of thought here (XTF, Geoff and me) to try to make what you do better and that really is the most important thing with this.
8 comments:
I too read Geoff's article with interest, as my primary portfolio is exclusively ETF/ETN based.
As a finance undergrad working on a quant-heavy MA in Econ, I did some analysis this spring on international ETF correlation risk, notably after observing strong similarities in movement which seemed excessive with respect to the underlying index, currency factors and other variants that should affect them.
For instance, iShares EWZ (Brazil) seemed to be a high-beta ETF that tracked the crude oil markets. Surprisingly (at first), even iShares EWO (Austria) had similar factors (to a lesser degree).
Then came the "it's the index, dummy" realization as I tore into them. EWZ's underlying index is more than a quarter petroleum industry, followed by a strong energy sector and filled up to a supermajority with energy-influenced basic materials and industrials.
The conclusion from my analysis is that if you're taking a multi-variate approach to risk diversification, you need to understand the exposure to those variates within your index in order to identify if you have collinearity issues - e.g. your risk is amplified - or if you're truly diversifying.
Is this a lot of work? It doesn't have to be. A spreadsheet can work well for looking for exposure to variates you're interested in. This approach (along with my own use of a weighted portfolio average of "risk buying" in particular variates) gives you a good idea how under or over-exposed you are to items like crude oil price.
Again, this approach is probably beyond the interest in passive ETF holders. While I'm very much buy-and-hold, I'm constantly adjusting my sector exposure to add where I believe the sector is under-valued and the approach has worked very well so far.
redherkey
iowa, usa
AGG is the Lehman Bond Index not Corporate, there's redundancy there.
I dont understand how one can justify the commissions on less than 1% exposure.
Great analysis redherkey, don't hesitate to post more on the subject.
OG
Return/risk characteristics are not a constant, ditto for beta or alpha. For a large part of the past 2 years, emerging market had better return/risk than S$P 500. For the past three months, it was just the opposite.
When most critical portfolio parameters keep changing all the time , how do one formulate a portfolio?
redherkey
If I can paraphrase your approach. Your goal is to have real diversification where you limit the degree of inter position correlation. You avoid a preponderance of positions that have high relative performance. You assume regression to the mean will pull up laggards. If so, how do you establish value and the laggards are less likely to stay laggards? Your work does sound interesting
XTF is one of four etf professional mgrs. Their model portfolio is competing against Bobo. Results are published in an online journal. So far, and I think every quarter, Bobo has been the winner. Bobo is a dart throwing monkey. Has to be humbling.
great comments, TY.
I wonder if Bobo went to the same B-school as Leonard the monkey?
The "X-Ray" at Morningstar.com is also a helpful tool in looking for redundancy in a portfolio.
I also wondered about why you'd pay commissions on 4 items that way less than 1% of the portfolio. Why not just use a total bond market fund?
Paul
Paul
My thoughts exactly, they should have used the AGG Index ETF only. I'm sure they intended to list the Corporate Bond ETF which is LQD.
But that raises a serious question, like - how good are these ETF Portfolio Managers if they don't know the major Bond ETF symbols? There are only about a half dozen of them. This could be a costly mistake.
OG
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