Ben Stein often mentions getting a dog, he is exactly right.Anyhoo a reader left a question yesterday about volatility of broad-based ETFs. He has observed that they seem to be as volatile as individual stocks. He likes the idea of reducing volatility but maybe is unsure whether ETFs actually do reduce volatility.
I don't think I agree with the general nature of his sentiment that broad-based products are as volatile as he thinks but that is his perception so it becomes his reality.
Obviously there are some stocks that are less volatile than the index to which they belong and also this summer has generally been more volatile than most of the last few years.
That fairly obvious answer aside the question drifts into portfolio construction. I write a lot about increasing or reducing volatility, I am talking about the entire portfolio not the individual components. I do not know the mindset of the person leaving the question but it is common for people to focus on the volatility of the individual holdings as opposed to the volatility of the overall portfolio.
Most of the accounts I manage have 40-45 holdings. There are two reasons why they will not all go up all the time. One reason is that if the do all go up together I would expect they will all go down together (the context here is weeks not on a given day). Secondly, if you buy 40 stocks it is not realistic to expect you will be right about all 40.
The sooner you can recognize an actual mistake and get rid of it the better but not every stock that goes down is a mistake. Back to financials; I expected the group to lag for reasons I have spelled out many times already. So this sector becomes a place to reduce volatility so maybe that means no small caps, no investment banks and no exchanges.
Not having those three sub-sectors allowed for less volatility than I might have otherwise had.
Materials is a sector that I have expected to do well and so adding some volatility seems like a reasonable idea, which is what I have done (this has been disclosed many times as well).
Believing we are close to the end of the cycle and that the chance for corrections is a little higher than normal I have taken steps to reduce the overall volatility even if some of the things I own are volatile. I have a little more cash than normal, I have favored dividends and I maintain a position in the double short fund. In addition to stock selection, these are tools to manage volatility.
The summer was a wild ride but the things outlined here (really what I have been writing about all summer) allowed clients to have a much smoother ride and luckily the places where I do have volatility have had a nice snapback effect (that I have also written about many times), I will detail performance in this weekend's video.
One of the reasons I specifically do not favor broad-based products is because of the fine tuning that is possible with narrower products. As TomK mentioned the other day not everyone has the time to construct a portfolio with so many moving parts--very fair point. An assumption I have made many times before is that the people who are inclined to seek out a blog for stock market commentary are generally more able/likely to spend enough time to come up with more than 80% SPY and 20% EFA.
13 comments:
In response to my question you note that volitility has increased so therfore the volitlity of broadbased etfs have also increased. However, I purchased broadbased ETFs in an attempt to limit volitility in volitile times. I think your response begs the question. I am still wondering if volitility reduction is an attribute of such vechiles in general. It appears that it makes more sense to pick the best of breed in the various sectors of the Dow and foreign markets-- not an easy thing to do-- for less of a ride. I turned to ETFs because the often expressed option to pick the best of breed often eludes me. Lastly, I throughly enjoy reading your blog.
Hi Roger
IYR ICF VNQ RWR....
Which one is the best for a portfolio? What is the difference between these as they all seem very similar.
Thanks
Love the picture of (presumably) your dogs. When all is said and done, they remain your best friends.
And more importantly, they don't care about money.
That's a complicated question and you should probably do some research.
Some of those, for instance, cannot hold management properties like hotels, some can.
ICF, I believe, is a "managed" ETF, isn't it?
Dammit, thought I had a blog post comparing ETFs. I'll have to make one.
And hey, if you're comparing ETFs, you should throw a WisdomTree ETF in there to look at.
By definition an index is less volatile than a stock. I don't really use broad-based products but my reasoning is different than yours. By definition you are taking more risk with best of breed. Most of those stocks have cut in half more often than has the S&P 500.
if you bought SPY at its high and held on you are down less than 2%--keep in mind you have one dividend coming to you in that time period.
An ETF for REITs is not my first choice but if you are correct that they are all very similar then wouldn't it have to be the case that at different times they take turns being "the best?"
I have studied a few foreign REITs and expect to do something there soon (think months) but do need to weigh the foreign REIT ETFs as part of the decision making process.
Those are two of our dogs; Roscoe (red dog) and Tater. We also have a chihuahua named Cappi and a little terrier named Kramer who is 15, in perfect physical health but lost her mind over a year ago.
I had a dog that lost her mind, and kept doing crazy $hit during thunderstorms. She was in perfect health but had to put her down. I'd like to have dog that didn't take a crap....that would be nice. I really like my dog, but after 13 years of cleaning up land mines, its getting a bit old.
i hear you.
Kramer is awake for about 3 hours a day. We have to be "ever vigilant" to get her outside as soon as she wakes up. While she is awake she plays with the other dogs, tries to steal food from Cappi, Saturday she even played with a toy.
its that first 20 minutes after she wakes up that is the challenge.
Hi Roger
Don’t forget PLEASE adopt from a animal rescue or shelter! NOT from a pet store or back yard breeder.
And don’t forget spay and neuter all your animals!!!!
You can see some great cats and dogs up for adoption at Petfinder.com and United Animal Friends.
UAF takes donations too!
love Mrs. Random Roger
Looking at ICF IYR VNQ and RWR
They all seem to have the same top holdings, just different weight.
Roger,
New etfs can languish and show very poor volume for quite a while. As a new guy on the block, any opinion you would venture on NLR...the nuclear one. 10day av vol is over 70k. Not hundreds of thousands, but do you consider this to be a good start and that an increase in volume bodes well for interest in the sector?
i wrote about NLR for RealMoney.
If a given theme appeals to you and you think an ETF is the best way for you to access it and you are buying a couple of hundred shares (or less) I wouldn't let the volume make the decision for you. OOO was closed and ishares closed a few sub-sector funds a few years ago and I think that has been it.
I do not know you so I do not know whether you should buy NLR, or anything for that matter, but the fund just listed ten minutes ago regardless of the volume, Van Eck didn't list it to close it six months later.
If nuclear is important to you, just pick whatever you think is best, period.
If you are a buyer of thousands of shares in whatever capacity you might want to tkae a different approach.
Lastly and having nothing to do with NLR I tend to prefer to let new funds trade for a while first before buying but there have been times where I have jumped right in.
roger .. there are some very sophisticated strategies with broad indexes. i for one ... have a portfolio composed of Index Futures (dow, sp, nas and rus). The face value of that portfolio equals 80% of portfolio total. With the other 20% I tune ... i have a theme of stocks in oil for instance ... whatever you think is right. And, then on top of that, since my portfolio only uses about 30% real cash (because of futures) .. the rest is in a money market fund yielding about 5%.
Between the broad index, a few theme adjustments and lots of cash working ... it is a formuala for less volatility in my opinion.
-Todd G
no doubt any set of tools can produce a great risk adjusted result.
Your use of the word sophisticated implies a level of work that some do it yourselfers may not want to do.
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