ETFs for the Lazy
I had an article publish today at TSCM (free site) in which I create a lazy portfolio that is noticeably different than the one I posted here a couple of weeks ago.
The portfolio, like all of them that get created, has strengths and weaknesses. Take it as an academic exercise.
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20 comments:
Roger, off topic, and feel free to pass on this question.
Would the blow up in sub-prime mortgage market--or really any of the structure financed vehicles be problematic for fixed income arbitrage hedge funds?
My guess is yes, but I really do not know.
Leisa,
it won't take much here before we move outside what I know here but...
The way the question is asked leaves room for many variables. I can envision where some funds were positioned to benefit from a decline in the SPM market.
I would imagine some funds chose no exposure.
How do you define problematic? Could some fund go Amaranth? Sure. At the other extreme couldn't some funds just have their toe in the SPM market waters and simply have a drag in their portfolio?
The range of outcomes is wide and while no one would be shocked if a fund goes belly up as a result I tend to think the vast majority of participants will have to disclose a bad quarter and that's about it.
The extent to which that is problematic is subjective.
any other takers?
roger, best lazy port i've seen, at least that's my gut response. What about adding:
an altnerative clean energy etf, which,by the way, how many choices are there for this sector?
And, what about dba for low correlation and commodities?
And, why not drop the australian currency because of overlap with the asia ex japan etf?
And, what about a momentum quant fund to capture growth, like xro?
And...how does one go about getting simlilar stats (sd, beta, etc) for their own port?
Gotta respect your self relfective write up on weaknesses, limitations etc. we little guys notice.Curious tohear a critique from tom k
I agree that my question was broad and your answer is a fair one.
I have to believe that the blow up in the credit spreads has someone on the wrong side of the trade. I'm just waiting to see whom.
Thanks.
DBA? Ha!
XRO? Never!
Ok, humor attempt. since the concept is in the eye of the beholder there is a lot of fair game here.
If you study history you will see the plain old value beats plain old growth most of the time. EXT leans growthier within value (is how I look at it).
The lean to australia comes from my belief that Australia offers the best potential to zig when the US zags.
DBA I own personally and while the case is sound I'm not sure what I really think of the fund.
PortfolioScience is $180 per year to get the type of info cited. I don;t know of anything cheaper.
oh and BTW thank you for the kind comment.
Very interesting stuff! I definitely want to spend more time with this.
This really doesn't fit my preconceived idea of what lazy portfolio is. I would call this a diversified theme portfolio. My guess is it would probably do as well or better than most lazy portfolios. Most lazy portfolios use large fixed income allocations to reduce volatility so this porfolio is really a break from the norm.
Roger certainly put a lot of thought into this and you can see that he practices what he preaches. No huge bets here. I really can't argue with the asset classes or allocations. I am a little surprised at not seeing more commodity exposure beyond gold and energy though.
I suppose my only criticism is it looks pretty traditional in terms of being very cap weighted - but I haven't looked into the guts of PHO, RWX, and PGF. Also, that criticism is probably unfair given this portfolio has very slim bond holdings.
The lazy portfolios remind me of using baseball cards to put together a dream team of different players, like we did as kids.
Previous batting averages and ERA's are no predictor of future performance, yada yada.
I have had DNH for a year or so and like it, it is heavy in financials, and Australian resources. Great fund. With the PHO, why not go with a broad generic utility fund like ETF, diversify water, electric, etc?
Another question...what do you think of using a sector allocation model..picking the top performing sectors in a quarter and riding those horses for the next couple of laps. The backtesting on top sectors perfoming well in the upcoming 2-3 quarters is pretty impressive. Thanks for any and all input. Scoot
I'll present this view one more time.
The sub-prime mortgage situation is not going to have a large impact upon anyone with decent credit or an entity that was not greedy. Institutional buyers that were intent upon accepting bundles of trash featuring juiced-up high yield junk mortgages will suffer some pain, as they are the last holders in this Ponzi scheme. But they will write off their losses and get on with other aspects of their business, so it is no big deal to them.
More than a few mortgage lenders and their minions who prominently solicited liar loans (client word of honor income statements without verification) and with a wink and a grin blew off pathetic credit scores are belly up or will close their doors shortly. Good. Capitalism works.
Well-positioned investors in real estate are having a field day at present bidding down and buying commercial and residential properties (not raw land - yet) from bank foreclosure departments or highly leveraged speculators who can't wait to sell for pennies on the dollar. Carl Icahn is buying hundreds of Southern Florida condos as this post is composed, the weakest market in the country.
The housing industry is in the doldrums. Home inventory is now at 6.7+ months. Home appreciation is predicted to generally fall between -10% and +2% parameters in 2007, which is a lot lower than homeowner expectations. Anything over 5 months inventory is considered the perfect storm for a buyer's market. Thus, research real estate and buy low.
Real estate is a business, and while there are some victims of predatory lenders, etc. , I submit that there are many more who bought or re-financed their property(s) over any reasonable value (greed), took adjustable or interest only loans because they expected prices to keep going higher (greed) and financial institutions who waived many prudent business practices to grant liar loans and loans to those who could not/would not every repay (greed). I will not go into fraudulent loan practices of rehabbers and flippers as this post is already too long.
I am a net buyer of real estate now, even though I may be a little early in some areas.My intent two years ago was to gradually liquidate much of my real estate portfolio. Some opportunities are too good to pass up.
Roger, I like your reasoning behind the lazy man portfolio. The thinking about those diversified parts is well done. In general, I like the lazy man portfolio concept. And they’ve been doing well for quite a while.
T, you've got a good analysis on the subprime / real estate fallout. I'm not sure it proves it's time to get back in, but if you can stand the short term costs the long term would work out under your assumptions.
These tow ideas tie in. A logically constructed lazy man portfolio should do well over the long term. And the added benefit is, it’s easy.
I think it’s important to remember that a lazy man construct should be easy to rebalance. The important thing to remember about real estate bullishness is simple mean reversion. Houses have traditionally not been great investments, dues to costs, for the aggregate. But the last five years have been great.
fyi scoot, DNH has not been around for one year....
Yes, roger's lazy port has a different ring, as tom k says "thematic". I see asia ex japan, energy, and commodities and all three hang together as a reasonable theme with diversity against the total domestic mkt. If the theme group...(my interp of it anyway)...goes south, I do believe that the theme will hold up overtime. But, it will be important to rebalance to take advanatage of any significant volatility. Roger, what would be your rule for rebalancing? How often? ps: I still think something that represents clean/alt energy is worth allocation. If you keep as is, or tweak in the near term, Ihope that you will compare this one to some of the other lazy ports by reporting a few times a year.
leisa,
you are a permabear and look for worst case scenarios while buying puts and shorts. You have been wrong far more than right girl.
Anonymous--10:30 p.m
No, I'm not a permabear and you've made this accusation on TK's site.
Something that I'm interested in is systemic risk and the role of hedge funds. In doing research on this topic I noted that fixed-income arbitrage had the highest volatility and the greatest failure rate. So my question had more to do do with an event that would potentially cause a problem.
It is worth noting that the issue with sub-prime really extends to the composition of these loans to the total loans and what that means for the housing industry.
First--Since 2000 housing value increases have outstripped earnings. There has been a focus on 'subprime' and there has been a sniff of dismissal of that. I think that sub-prime is a bit of a red herring for these reasons: (a) 60% of our recovery (and I'm not sure of the correctness of that number) since 2000 is due to house construction; (b)house values in the last 6 years have far outstripped the ability of of credit-worthy people to buy without designer loan assists (I have these numbers if any wants them); (c) the Federal government has provided loan assists and seed money to encourage home ownership; (d) where there is money there will be greed and graft--this is a commission and fee driven business; (e) an unprecedented number of homes have been built; and (f) the % of MONEY (notice I'm not saying people) buying homes are in these designer loan assists; (g) this stuff was sold like sausage--and like sausage, all manner of bits were stuffed in the casing to make it seem like a delicacy with the yields.....
Accordingly, this becomes a financial system issue, and AHM's notice is the first one that encapsulates the credit spread widening into their loan valuation which has torpedo'd their earnings. Remember, that the market is just now digesting these risks, and those spreads can widen still. (Note that the interest rate spreads are different than the actual loan write offs due to loan losses). Look at what it did for their earnings.
I think that T's analysis paints the best picture of the potential outcomes. The sheer number of the bond securitations is huge. There's a lot of this crap floating around, and there's been surprising little discussion about WHO is holding this stuff. I don't think that these mark to markets are going to be inconsequential after all is said an done.
I have a slightly off topic question with regard to a "balanced" ETF portfolio. I've recently had some gains from the sale of another asset, so I have a reasonable amount of cash that I've transferred to my brokerage account. I've been studying asset allocation for a couple of years and have a pretty good idea of the assets and allocation figures that I'd like to shoot for. My question is this though, I haven't found any suggestions on how to get in. Should I just take the plunge and invest the whole sum today? Should I buy each asset on the dips? Any rules of thumb here? Should I ease in over months or have a target date to have the allocation set?
anon 5:11,
assuming you have 10+ years before you need the money I would put it all in at once. Here's an interesting article on the related topic of dollar-cost averaging:
http://moneycentral.msn.com/content/P104966.asp
Yes, I do have 10+ years and will be adding to this with more cash quarterly. Thank you for the link.
the lump sum question is a great one. I'll post on it Wed morning.
Hi Roger,
Thanks so much for sharing your lazy portfolio ("ETFs for the Lazy") and your investment ideas in general. Do you know what the tax implications are when selling DGL in a taxable account? That is, would gains from DGL be taxed as a collectable? I'm guessing the answer is "no" since DGL invests in linked futures contracts, but I wanted to be sure.
Rich
I will qualify this with get a first hand answer from DB.
The DB commodity ETFs that use futures are taxed with 60/40 structure.
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