A little help?I've mentioned a couple of times that I will be speaking at the Moneyshow in Vancouver in April. I found out this week that I will be giving a solo presentation on portfolio construction with ETFs.
In the past I've done a presentation or two like this and written articles in a couple of place on the topic. What I do with this is build an actively managed portfolio going sector by sector using all types of ETFs in an effort to build a practical, diversified portfolio with the weightings I think make sense and embedding themes that I think are useful. The concept lends itself to updating every so often because of the new funds that come to market.
The big idea is not run out and copy this but more like here is a example of how narrow based ETFs allow for building portfolios that can offer much better diversification and avoidance than broad based funds.
One time that I did a presentation on this, two or three years ago, there was feedback from someone who did not understand why I picked what I picked for the portfolio. This person did not know whether the picks were random or what. I spent the whole time talking about the various holdings and why they were there but obviously was not effective in terms of reaching this one person and so I have to believe he was not the only one in the room who felt this way.
If I am going to speak to a crowd (although I can't rule out crickets and tumbleweeds) it would be nice if it were useful to them which is where you, hopefully, come in.
If someone is picking an ETF what do you want to hear from him as to why? If I include iShares Singapore (EWS) as part of the allocation to financial stocks, it is about 50% financials, what would be useful for you to hear presuming you are their to learn something and that I might have something useful to say.
Any input from readers would be much appreciated.
16 comments:
IMO your readers break into different demographics. I'm in the third quarter of my game group, i.e, finishing my capital accumulation and transforming to the periodic withdrawal/ retirement phase. How to make that transformation smoothly and design an income portfolio from ETF's that will be robust WRT inflation and stable returns would very helpful. I'm sure the second quarter demographic would have very different needs.
I asked the 4% .....7% question . Thanks for the reply.
RW, I learn a great great deal from your posts. Normal( linear) versus power distributions are lost on analysts. Talib and Mandelbrot helped me understand that several years ago
Thanks,Sam
When we give presentations, we try to follow the old saw--tell 'em what you're going to tell 'em; then tell 'em; then tell 'em what you just told 'em.
In your case, I'd lay out your objectives and crieria up front: S&P sector goals, foreign weightings, and whatever themes you choose to include. Next, pick the etfs and, as you do so well, unmask the holdings to illustrate how they fit those criteria. (For clarity, I think it's important to discuss some alternatives that DON'T fit your criteria, too.) Finally, total it all up with percentages against the criteria you laid out up front, and go off to the bobsled course for some fun.
good suggestion TY, and there will be no shortage of going to see stuff XD
Roger - Great opportunity, congratulations! If I am in the audience at a "moneyshow" I am interested in two things from an ETF presentation - Strategy & Tactics. Discuss the strategy of a well-crafted ETF portfolio with a quick Feature-Benefit section then move into your tactical choices. Or stated another way, Top-down strategy/themes, bottom-up tactics/choices. You will cover your objective of discussing a portfolio of better, more controlled diversification. I would be very interested in the "why" section of EWS over EFA for example.
If someone tapes your presentation, please post! Would love to see you in action.
Enjoy the bobsled run!
I'd say you would need to cater for most levels of experience if you want everyone in the room to 'get it'. The problems with this are inherent in teaching any subject to a group of people who come from different backgrounds - you can either bore half of them for half the time, bamboozle half of them, or a mixture of the two.
Then again, maybe the guy was just being helpful by asking for clarification, on behalf of his deaf 95 year old mother!
"How to make that transformation smoothly and design an income portfolio from ETF's that will be robust WRT inflation and stable returns would very helpful. I'm sure the second quarter demographic would have very different needs."
IMO, I this would be a great talk too. There seems to be too much emphasis on the accumulation phase and very little on decumulation. This dovetails with the topic from yesterday in that "luck" defined as a sequence or poor or good returns is the greatest factor in a successful retirement portfolio (aside from excessive withdrawals).
So to answer your question, I think you need to inform the audience if your talk will be focused on accumulation or decumulation portfolio construction.
Roger - Perhaps I can represent the less sophisticated people in your audience: I would be interested in hearing about the ETF's that sort of "fly under the radar" and do not follow the S&P in a lockstep fashion.
Attempting to diversify away from the U.S. is not as easy as it sounds.
And practically speaking, how much daily volume should an ETF have to not be too risky to buy and sell?
Make sure you fully disclose that the average ETF's tracking error is 1.25% and could have an adverse impact on the outcome of any strategy.
Yeah, I'd be interested in hearing more about the tracking error problem too. Heck a Vanguard Telecom Services ETF beat its benchmark by 17 percentage points last year. And a whole bunch of other ETFs lagged their benchmarks by a lot. Maybe that wouldn't be the crux of your talk, but I'm getting more nervous about turning my portfolio from mutual funds to ETFs in light of the tracking error.
tracking error of 1.25% in an extremely volatile ETF isn't much. That might be the difference between buying at 11am or 3pm in a given volatile day.
Personally, I would like to hear some perspective on why Singapore may perform better than the region or the sector. Is it a key financial hub to the higher growth/developing 'pacific region' ?
Then some perspective from a portfolio perspective. Some comparison charts vs EPP or EFA, Or some simple back-testing showing how ews either enhances return or reduces risk vs a comparison index.
Chris
www.etfreplay.com
I'm a long time reader of your blog and appreciate your reasoned approach to investing.
Regarding ETF's: In my own account, I always grapple with correlation analysis. I find myself discarding ideas when I discover the diversification I thought I'd get just isn't there. So perhaps you could expand on bulding a portfolio of ETF's within the context of correlation.
Thanks,
Phil
I want to echo's Phill suggestion above (i.e. importance of non-correlating assets). Also, how many positions is too many? Does it make sense to make a bet on an ETF that is only 2.5% of your total portfolio?
I'd just walk through it. It's a portfolio creation presentation and you're a top down guy so start at the top and work your way down.
1. What's my equity/bond allocation and why
2. In the equity, what's my domestic/int'l allocation and why? right here, you can break into why you think countries are important and how that contrasts with, say, an index portfolio. You could even throw in a slide about how it's important given certain scenarios (inflation, deflation, China, Greece/Euro blowing up, oil, etc.) People understand index portfolios, and you need to break them off that path.
3. Create a small list, maybe of what you're looking for in a country and then what countries that leads you to.
4. Now, say, you want Singapore. What's important about Singapore (banks, publicly listed brothels, whatever). This determines how you approach it. If you know what you want and some Ishares thing gives you that, fine. If not, then maybe you need big fat representative stocks.
Etc. You probably did all this and the guy with questions just didn't listen.
clearly there was an element of not listening.
the idea of tell them what I'm going to tell them, then tell them, then tell them what I just told them is a great approach.
thank you for all the input.
I agree with your approach to building a diversified portfolio via sector etfs, and it seems fairly straight forward to me. I especially like how you integrate themes into the sectors!
A few thoughts/questions are below. Perhaps they might flow into your thoughts/presentation as it evolves.
- Rebalancing - how often would you "rebalance"? Since this is a somewhat "active" mgmt approach I assume it might be at least quarterly. Also when you do rebalance, what "tolerance" of the benchmark would be a guideline? or would the concept to be to underweight the sectors that have grown too large of a percentage of the s&p compared to history. Net/net - the set-up of this etf sector based approach seems straight forward but it is the management of the approach that seems a little more tricky and important to me.
- Short ETFs - I believe you have at times in the past suggested SDS as a tool to short the market when things get overheated. Have you considered shorting sectors via etfs as an alternative? There are now numerous etfs that make that easier.
- FYI - the spyder web site has what I think is a powerful chart about the importance of sector selection.It states "over the last 10 years the average difference between the best performing and worst performing sectors has been more than 42% per year". I've always known/felt that sector selection is key, but 42% was a surprise to me. Seems like all a persons time should be spent on sectors.
Bill in Illinois
Roger,
I would address tracking error, slippage, and comparisons against using your own "basket of stocks" or an old fashioned mutual fund.
Quints.
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