ETF Investing Guide: A Core ETF Portfolio [View article]
I haven't updated the text of the guide, but have addressed a few updates in the comments. All the core points in the guide stand. The only change is that since the guide was written, some new ETFs have become available, and some ETF issuers have cut their expense ratios. But out of the list above, the only one I would for sure change is replacing (EEM) with (http://bit.ly/tTtLUo), due to the significantly lower expense ratio, and considering (http://bit.ly/sg77Wm) or (http://bit.ly/rAvT6F) as an additional ETF to cover emerging market small caps.
Why Broad-Based Index Funds Are Still the Wrong Tool [View article]
Hi Roger,
First off, thank you for your smart and thought-provoking views, and the care you show in responding to people. You're a class-act, as they say.
There seem to be two powerful but separate arguments in what you're saying:
(1) Investors should hold diversified portfolios, and the broad indexes like (SPY), (EFA) and maybe (EEM) are too correlated with each other. So investors should look for asset classes which are less correlated, and that requires using narrower indexes or other instruments.
(2) You're not optimistic about the broad US equity market for the foreseeable future, so if investors want to grow their portfolios, they'll have to seek alpha (no promotion of this site intended!) in narrower asset classes and individual stocks.
My personal view is that (1) is absolutely correct. But (2) may be harder. In another article you published yesterday, you pointed out how hard it is to pick stocks (seekingalpha.com/artic...). Is it definitely easier to pick asset classes? My guess is that few people would have predicted the massive outperformance of US small caps at the end of 2010, or the poor performance of China last year, eg. (FXI).
Perhaps the right approach here is to reap the benefits of asset class granularity via rebalancing, rather than trying to pick asset classes. You can get greater granularity by breaking the broad indexes into sectors, styles or (as you've advocated) countries. The downside is that narrower ETFs tend to have higher expense ratios.
I haven't found much literature about rebalancing. I tried to think about the advantages and risks of this strategy here, but it's fairly rudimentary: seekingalpha.com/artic... and seekingalpha.com/artic...
Why Broad-Based Index Funds Are Still the Wrong Tool [View article]
Roger,
Can you be more specific about which broad-based ETFs you have in mind? I wasn't clear whether you are referring to broad-based US equity ETFs like the total market ETFs (IYY) and (TMW), or global ETFs like (VEU).
Would You Want to Mimic News Corp.’s 401k Savings Plan With ETFs? [View article]
Why is the Diversification poor? If you buy each of the funds, you have diversification across small, medium and large US stocks, foreign stocks, and bonds. What's wrong with that?
And my guess is that there's some special deal on NWS' own stock, which is why it's in the plan. Admittedly, if you already have income exposure to your job, it makes no sense to own your company's stock in your 401k, but it must be in there for some reason.
ETF Investing Guide: A Core ETF Portfolio [View article]
dtmway, Why would you tolerate high risk, given that you have no earned income and are now reliant on capital? Surely your no. 1 priority is to preserve your capital?
ETF Investing Guide: A Core ETF Portfolio [View article]
Bill, I didn't suggest weightings - as I said in my comment above, the way you weight asset classes should be a function of your risk tolerance, for example your age.
ETF Investing Guide: A Core ETF Portfolio [View article]
bobnj666 --
I didn't suggest an asset allocation at all in the Guide. I left that to the individual investor, because it's a function of your risk tolerance (for example your age).
The core portfolio was designed for long term investors. Over (very) long periods of time, stocks always rise, if for no other reason than that companies' revenues, profits and stock prices rise as general prices rise (inflation). The same is not true of gold, other commodities or currencies. (They *might* rise, but there's no logical reason why they *have* to rise; and there have been extended periods of time when general prices have risen but commodity and gold prices have fallen.) So for the core portfolio, I still wouldn't include commodities or currencies.
There's considerable debate, however, about impending inflation due to the high levels of government debt caused by the bailouts, rising healthcare costs and shrunken tax receipts. Gold, silver and other commodities *can* be a hedge against inflation; so you could consider them.
But beware: it's hard to avoid looking over your shoulder at what's done well in the recent past, and projecting that forward. Many investors have lost a *lot* of money that way.
How to Play the Dollar's Fall With ETFs [View article]
Since I wrote this article, a bunch of new commodity, currency and global equity ETFs have become available. Here are some useful tables showing you the key asset classes and their performance:
ETF Investing Guide: A Core ETF Portfolio [View article]
A reader wrote: "David, you mention in your core portfolio section that you haven't updated since 2003 (thus EEM instead of VWO). I was wondering if next time you rebooted you'd consider consolidating the small & mid-caps (IJH IWM @ .20) into Vanguard's extended market VXF @ .08 (this one might even be worth putting in the smaller version if you were willing to expand that from 5 to 6). And EFA @ .35% could be replaced w. VEA @ .12."
These are good suggestions. However, the argument for separating US equities into separate small, mid and large cap ETFs is that there are significant differences in performance. At the time of writing, for example, they are up y/y 25%, 36% and 25%. If you separate them, that provides more opportunities for rebalancing, assuming they revert to a mean long term growth rate.
Since this was written, iShares issued a new Microcap ETF - the symbol is IWC. (For comparison's sake, it's up 23% y/y as I write this.)
ETF Investing Guide: A Core ETF Portfolio [View article]
KTAN, I avoided tactical asset allocation (changing the ETF weightings based on market conditions) in favor of consistently following a rebalancing rule; see etf.seekingalpha.com/a... . But I realize that still leaves you with the problem of when and how to "jump in" for the first time. Some thoughts on that here: etf.seekingalpha.com/a...
David
On Nov 19 06:06 PM KTAN548 wrote:
> Hi David, any new updates on what an ETF Core Portfolio should look > like in current climate? Is the one you mentioned above still applicable? > Any changes or revisions? Please advise. Thanks.
ETF Investing Guide: A Core ETF Portfolio [View article]
Stewart, a few years ago, when dividends were all the craze, I was skeptical about them for the reasons outlined here: seekingalpha.com/artic...
Dividend ETFs also suffer from the problem that investors often don't look at what's inside them. In some cases, they're basically utility, REIT and financial stock sector funds. That's one of the reason that US dividend ETFs have underperformed the market over the last 12 months.
However, there's now some discussion about dividend paying stocks outperforming bonds due to the extremely low interest rates paid on bonds. For example, Pimco's Bill Gross recently said that utilities were more attractive than bonds. So this makes dividend ETFs more interesting. I'm not sure that's enough to update this page, but in any case you can view the dividend ETFs here: seekingalpha.com/artic... seekingalpha.com/artic... seekingalpha.com/artic...
David
On May 23 03:25 PM stewart wrote:
> how about David giving some thought to a dividend driven etf model > portfolio with consideration for yield, growth and capital prevervation..
ETF Investing Guide: A Core ETF Portfolio [View article]
mtwoman, first, to clarify -- the ETFs listed here are bond index funds, not actively managed bond funds.
There are a few reasons why you might want to buy a bond index fund instead of buying individual bonds: - owning lots of bonds spreads the risk - you only have to buy a single ETF, instead of researching and buying many individual bonds - you don't need to worry about buying new bonds when your current bonds mature - the spreads on buying and selling individual bonds, particularly illiquid muni bonds, can be wide.
At the same time, there are disadvantages. You pay a management fee, whereas buying from Treasury Direct is free. And you have more control over maturity dates if you buy bonds directly.
ETF Investing Guide: A Core ETF Portfolio [View article]
Why Broad-Based Index Funds Are Still the Wrong Tool [View article]
First off, thank you for your smart and thought-provoking views, and the care you show in responding to people. You're a class-act, as they say.
There seem to be two powerful but separate arguments in what you're saying:
(1) Investors should hold diversified portfolios, and the broad indexes like (SPY), (EFA) and maybe (EEM) are too correlated with each other. So investors should look for asset classes which are less correlated, and that requires using narrower indexes or other instruments.
(2) You're not optimistic about the broad US equity market for the foreseeable future, so if investors want to grow their portfolios, they'll have to seek alpha (no promotion of this site intended!) in narrower asset classes and individual stocks.
My personal view is that (1) is absolutely correct. But (2) may be harder. In another article you published yesterday, you pointed out how hard it is to pick stocks (seekingalpha.com/artic...). Is it definitely easier to pick asset classes? My guess is that few people would have predicted the massive outperformance of US small caps at the end of 2010, or the poor performance of China last year, eg. (FXI).
Perhaps the right approach here is to reap the benefits of asset class granularity via rebalancing, rather than trying to pick asset classes. You can get greater granularity by breaking the broad indexes into sectors, styles or (as you've advocated) countries. The downside is that narrower ETFs tend to have higher expense ratios.
I haven't found much literature about rebalancing. I tried to think about the advantages and risks of this strategy here, but it's fairly rudimentary:
seekingalpha.com/artic...
and
seekingalpha.com/artic...
Why Broad-Based Index Funds Are Still the Wrong Tool [View article]
Can you be more specific about which broad-based ETFs you have in mind? I wasn't clear whether you are referring to broad-based US equity ETFs like the total market ETFs (IYY) and (TMW), or global ETFs like (VEU).
Would You Want to Mimic News Corp.’s 401k Savings Plan With ETFs? [View article]
Would You Want to Mimic News Corp.’s 401k Savings Plan With ETFs? [View article]
And my guess is that there's some special deal on NWS' own stock, which is why it's in the plan. Admittedly, if you already have income exposure to your job, it makes no sense to own your company's stock in your 401k, but it must be in there for some reason.
On not owning your own company's stock, see: seekingalpha.com/artic...
ETF Investing Guide: A Core ETF Portfolio [View article]
Why would you tolerate high risk, given that you have no earned income and are now reliant on capital? Surely your no. 1 priority is to preserve your capital?
For a discussion of capital vs. income, see this article:
seekingalpha.com/artic...
and more important the discussion of dividends vs. capital in the comments:
seekingalpha.com/artic...
ETF Investing Guide: A Core ETF Portfolio [View article]
ETF Investing Guide: A Core ETF Portfolio [View article]
I didn't suggest an asset allocation at all in the Guide. I left that to the individual investor, because it's a function of your risk tolerance (for example your age).
The core portfolio was designed for long term investors. Over (very) long periods of time, stocks always rise, if for no other reason than that companies' revenues, profits and stock prices rise as general prices rise (inflation). The same is not true of gold, other commodities or currencies. (They *might* rise, but there's no logical reason why they *have* to rise; and there have been extended periods of time when general prices have risen but commodity and gold prices have fallen.) So for the core portfolio, I still wouldn't include commodities or currencies.
There's considerable debate, however, about impending inflation due to the high levels of government debt caused by the bailouts, rising healthcare costs and shrunken tax receipts. Gold, silver and other commodities *can* be a hedge against inflation; so you could consider them.
But beware: it's hard to avoid looking over your shoulder at what's done well in the recent past, and projecting that forward. Many investors have lost a *lot* of money that way.
- David
How to Play the Dollar's Fall With ETFs [View article]
How to Play the Dollar's Fall With ETFs [View article]
How to Play the Dollar's Fall With ETFs [View article]
Currencies:
seekingalpha.com/data/...
Commodities:
seekingalpha.com/data/...
Global equities:
seekingalpha.com/data/...
ETF Investing Guide: A Core ETF Portfolio [View article]
These are good suggestions. However, the argument for separating US equities into separate small, mid and large cap ETFs is that there are significant differences in performance. At the time of writing, for example, they are up y/y 25%, 36% and 25%. If you separate them, that provides more opportunities for rebalancing, assuming they revert to a mean long term growth rate.
Since this was written, iShares issued a new Microcap ETF - the symbol is IWC. (For comparison's sake, it's up 23% y/y as I write this.)
ETF Investing Guide: A Core ETF Portfolio [View article]
David
On Nov 19 06:06 PM KTAN548 wrote:
> Hi David, any new updates on what an ETF Core Portfolio should look
> like in current climate? Is the one you mentioned above still applicable?
> Any changes or revisions? Please advise. Thanks.
ETF Investing Guide: A Core ETF Portfolio [View article]
Dividend ETFs also suffer from the problem that investors often don't look at what's inside them. In some cases, they're basically utility, REIT and financial stock sector funds. That's one of the reason that US dividend ETFs have underperformed the market over the last 12 months.
However, there's now some discussion about dividend paying stocks outperforming bonds due to the extremely low interest rates paid on bonds. For example, Pimco's Bill Gross recently said that utilities were more attractive than bonds. So this makes dividend ETFs more interesting. I'm not sure that's enough to update this page, but in any case you can view the dividend ETFs here:
seekingalpha.com/artic...
seekingalpha.com/artic...
seekingalpha.com/artic...
David
On May 23 03:25 PM stewart wrote:
> how about David giving some thought to a dividend driven etf model
> portfolio with consideration for yield, growth and capital prevervation..
ETF Investing Guide: A Core ETF Portfolio [View article]
There are a few reasons why you might want to buy a bond index fund instead of buying individual bonds:
- owning lots of bonds spreads the risk
- you only have to buy a single ETF, instead of researching and buying many individual bonds
- you don't need to worry about buying new bonds when your current bonds mature
- the spreads on buying and selling individual bonds, particularly illiquid muni bonds, can be wide.
At the same time, there are disadvantages. You pay a management fee, whereas buying from Treasury Direct is free. And you have more control over maturity dates if you buy bonds directly.
Hope that helps.
David