The other day I had some fun poking at the ETF portfolios put forth in Barron’s by the experts. I thought it might be useful to go over what I would suggest makes for a more strategic approach than owning both SPY and DIA or splitting every conceivable asset class into multiple broad holdings in the context mentioned the other day.
As a matter of compliance we think there are rules against putting percentages in blog posts so I’ll avoid that. Also there are commission logistics to take into account. TD Ameritrade has about 100 commission-free ETFs but only three of those are sector funds.
An account sized such that $40,000 or so is going to equities is probably better off avoiding sector funds because of commission drag but obviously if there is some platform what allows commission-free access to sector funds then there would be no economic reason to not use sectors.
In terms of a portfolio where for whatever reason broad based funds make the most sense I would say you do not need every cap size or both styles for every cap size. When I was at Fisher ten years ago they had research saying the correlation between domestic mid cap and domestic small cap was something like 90 or 95% and I would imagine that it is now higher given that “all correlations have gone to one.”
I do believe that having both domestic large cap (or mega cap if you prefer) and domestic small cap in a portfolio that only uses broad based products. There is research out there that says small cap value is the best performing domestic asset class, where it is economical it makes sense to choose that over all small cap like IWM. I’m not a huge fan of trying to game value over growth in this type of portfolio as there are rules of thumb about value over growth or vice versa but of course that may not always work.
For domestic large cap it may make sense to use a dividend product. Obviously a dividend ETF will increase the yield of the mix but it should also help with smoothing out the ride a little depending on what is under the hood. When WisdomTree first hung its shingle I wrote up many of the funds for TheStreet.com but always included a bit about watching out for the financial exposure. That still applies. If you are going to use a dividend fund for domestic large cap I would tell you to avoid one that is overly heavy in financials–if any still exist.
Developed foreign becomes tricky as most broad funds are heaviest by far in Big Western Europe and Japan. There are choices that avoid these areas of course. For some accounts we use Global X Nordic (GXF), we also include iShares Canada (EWC) in some instances and while we are out of Australia now I am sure we will be back at some point. To be clear the context of our use of these funds are for accounts where individual stocks or sector funds may not be the best way to go for whatever reason.
For emerging there are broad funds to choose from like EEM, there are country funds like iShares Chile (ECH) and there are thematic funds like iShares Emerging Market Infrastructure (EMIF). We use ECH and EMIF in various way for clients. Both ECH and EMIF tend to be less volatile than EEM. If someone wanted to ratchet up the volatility they might choose one of the broad based small cap emerging market funds that trade or even one of the small cap country funds–iShares has a couple of these and Index IQ has several of them.
The idea that a small account can only use a fund like EEM is silly. For many people a broad fund will make the most sense but why can’t an opinion be expressed with Index IQ Small Cap Taiwan or EG Shares India Consumer? Yes there is an added volatility element but if you understand that and what the consequence for being wrong is and you’ve done the research then you should own what you think is the best proxy.
I might suggest a split between something like the above and a dividend fund like the EG Shares fund with the symbol HILO. It just changed its name you can get the proper name yourself at their site but the yield seems pretty good and with a few months under its belt it seems to be delivering on its low volatility promise but you should decide for yourself.
I believe in gold exposure and use GLD for most small accounts (we use it for large accounts too). The other precious metals have more of an industrial/cyclical element to them which is why I prefer gold but you get the idea, there are also a couple of funds with access to multiple metals.
This turned out to run a little longer than I thought so I will try to get to a sector approach in the next couple of days.
As for the quick trip to Maryland, I think all I am allowed to say is it went well, that and the crab cakes were good. I’m headed back to Arizona this morning.