Vanguard filed for an All-World ETF, iShares already has one with ticker ACWI and Northern Trust has one in the hopper. The underlying indexes have US, developed foreign and emerging foreign.
This is probably the purest index exposure one could have. Like any other index fund of course this type of product will have flaws and by blending together everything a lot of the attributes from the components will be blended away. Be that as it may it is still indexing at its purest--IMO anyway.
One thing to note is that foreign lead domestic in the 70s, 80s and this decade and domestic lead in the 90's. If I had to make a bet on either the US or the rest of the field I would take the field but there will be periods that US outperforms and so an All-World product will obviously lag which is important to remember.
This brings up the idea of how lazy can a portfolio be and still add a little value. If I really wanted to buy the world and just keep it forever (assumes proper asset allocation) I think I would add in some sort of absolute return fund to smooth out the ride. In this little exercise I am assuming the bigger chunk goes into the all-world and a small portion to absolute.
The goal would be to smooth out the bear markets a little and if you can average 8% from the all-world and 5% from the absolute and you save properly (which is always the most important) you can probably do ok.
This is obviously not my preference nor would it be my 5th choice but it makes for an interesting discussion....what say you?
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16 comments:
My design for a passive investment vehicle would focus less on volatility issues and more on using fundamental constraints to avoid overvaluation and sentiment bubbles. Rather than go all the way from market cap to fundamental indexing, I'd like to see either market cap weighted or roughly equal weighted subject to a set of constraints like: no more than X1% weight in any one stock, no more than X2% in any one industry, no more than X3% in any one end user market (realize this last one would take extra analysis to implement), etc. Basiclly I wouldn't worry about relative performance compared to the S&P 500 or volatility per se, but I would like to see improved diversification over as many macro bets that one thinks might be significant.
I think 10 to 50% of a portfolio in 2 or 3 of these etfs would be a good start to a diversified portfolio.
Then you could target sectors or countries with the rest.
There's a post up at indexuniverse.com which posits that the BGI All World etf could fundamentally change the way people invest. It argues that the mix eliminates "home bias" and any deviation immediately adds risk to one's portfolio. Maybe I'm misunderstanding the author's point, but that logic sure seems wrongheaded to me.
i saw that article, it was a little fuzzy, I would also add that a reader at seeking alpha commented that 40% US is too much it should be 25% based on GDP.
I don't know about that one.
Home bias is an important concept yes but an allworld fund as the best way to mitigate it? maybe not but it is a starting point for learning about the concept.
I'm not too up on absolute return funds - are there absolute return ETFs?
I've touched on one of your ideas a bit in the past year. I am, IMO, overexposed to foreign becuase a mutual fund I own has done so well. I've been tempted to take profits, every time I think that I think "long term, I think international is the place to be. So maybe my thoughts on what overexposure is are wrong."
Roger,
I've never seen you address the issue directly, but am I to assume that you don't believe in CAPM? You've stated many times that broad-based foreign funds such as EFA "blend away" the benefits of foregin diversification. But just for the record, according to CAPM theory the maximally diversified portfolio is supposed to be the market-cap-weighted international portfolio (i.e., something like ACWI).
- Adam
have your discussed the Lazy
Portfolios as yet?
http://tinyurl.com/22kca5
I'm 100% and wondering where to
go whenever this....is over.
thanx
Adam, you are correct, hence my "this would not be my 5th choice" quip.
SD, you need to rebalance depends on how far you are from your target, if you even target a certain foreign domestic ratio.
the saying about letting your winners run is correct some portion of the time too which is probably in the back of your mind.
FWIW i don't target X% as a number for all time. At times i want to increase or decrease, more likely to increase slowly over a period of quite a few years.
i have written a few times about Lazy portoflios, you can search the archive and find a few things.
i am not the best person to ask as portfolio management and all things related is the one thing in my life I am not lazy about.
The major flaw is at the international portion will only cover 85% of the market capitalization so you'll need a samll cap fund to cover that part of the market. Ironically US Total Stock Market funds generally cover 98% of the investible market. Don't know if this fund does that on the US side.
Paul
I've never thought about home bias before but it probably does color one's thinking about portfolio construction. If you're an investor in, say, Italy, I imagine that the business and economic news gives you an in-depth understanding of the investment environment there that naturally skews your allocation and picks. Maybe the laws, too. If you believe in the adage of invest in what you know, I can see how home bias becomes an important concept. Her too, obviously.
Charles Kirk has done a lot of lazy portfolio write-ups at his Kirk Report site, many quite detailed. Do a search at http://tinyurl.com/3gpu7f and you'll get most of them.
The Dick Davis Dividend book also has a fairly complete listing of lazy portfolios by various financial managers, including Kirk.
-Bongo
check out scott burns and his lazy portfoios...http://assetbuilder.com/blogs/scott_burns/archive/2008/01/18/put-sloth-to-work-for-you.aspx
Block 1: Domestic total stock market, such as Vanguard Total Market Index fund/ETF
Block 2: Treasury Inflation Protected Securities, such as iShares TIPS
Block 3: International total market, such as Fidelity Spartan International Market
Block 4: International bonds, such as American Century International Bond
Block 5: REITs, such as the Vanguard REIT ETF
Block 6: Energy, such as the Vanguard Energy ETF
Block 7: Large U.S. value stocks, such as iShares Russell 1000 Value ETF
Block 8: Small U.S. value stocks, such as iShares Russell 2000 Value ETF
Block 9: Emerging markets, such as Vanguard Emerging Markets ETF
Block 10: International value stocks, such as iShares International Value ETF
thanx from
anonymous 7:43am
for all the "Lazy Info"
I plan to set it up soon...I'm
100% cash...I will continue
to read Roger etc. but I need to
get a life;-)
I have a home bias to Australia because investing in Australia is tax advantaged for Australian investors. I'm aiming for a 50:50 Australia/foreign mix, which is still a massive overweight to Australia. My Mom's portfolio does follow a no bias stock allocation or even a negative home bias. She lives in Israel and we invest offshore.
The US is near 50% of world stock market capitalization but 20-25% of GDP. Maybe there is room for a GDP weighted all world ETF? :)
The downside of the all world ETF is that you don't rebalance out of markets that are getting overvalued which one might if one weighted according to GDP. So the latter might be a really good idea?
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