An ETF Package That Outperforms the S&P 500: Update

This article has two objectives: 1. To be put on record, and 2. To give investors a plan that could offer better returns in 2009 than the S&P 500 index (SPY).

After posting my original article on an ETF model portfolio, several readers offered interesting comments and questions.

One comment noted that my portfolio was “similar to the equally weighted S&P 500”. Using RSP, the Rydex Equal Weight S&P 500 ETF, as an additional comparison, for the last 5 years, 2004-08, the period in which the RSP was available, the results are:

Thus, over the last five years, “HMF” produced an average “return” that was 4.7% better than RSP and 3.0% better than SPY. While losing almost 50% in 2008 is bad enough, it is at least better than losing over 60% in RSP.

Another comment to the original article mentioned that many strategies work for a year or two but there is “never any guarantee about the future”. I suppose I agree, but the “HMF” ETF package discussed has worked for seven (now eight) consecutive years vs. SPY, and, of course, there is never a guarantee it will continue to outperform.

One reader entitled his comments “the lazy person’s portfolio”. Thanks, as that was part of the purpose of developing the system, as well as beating the S&P 500 Index (SPY).

2008 was obviously a rough year in the stock market. Nevertheless, the Home Made Fund continues to outperform both the S&P 500 index and the S&P 500 Equal Weight Index over a multi-year average period (8 years vs. SPY; 5 years vs. RSP).

To start your own “HMF” for 2009, the portfolio would be (using 12.31.08 prices and a total $10,000 investment):

Purchasing the shares indicated will result in approximately 11% in each ETF/sector.

Comments

[jim murray:]

Is there a news letter that I can subcribe to that we give me a good investing stratgy tell me when to buy and when to sell possibably daily or weeky emails a good proven group of stradgists. I frefur lower cost stocks as i do not have a lot of cash. I am 54 years old I sold my company to a company in Canada and took most in stock 300,000 shares @ $8.00 per share with a hold on the stock so I could not sell right away the shares are worth $.55 now a big loss the company is a junior oil service company Centeral Alberta Well Services CWC.A. I think they have a good future but short term is not good howerer they are making money. Any ideas how I can get going again? tThank You Jim

Jan 05 08:26 AM

[DRH:]

Thankyou for the portfolio idea. It seems reasonable except that the holdings include the financial services ishares AND the financial services SPDR. Why two ETFs in the financial services space, while everything else seems very balanced? Is this an intentional attempt to overweight one sector. It would seem to me that there will end up being a disproportionate amount of money going into companies like JP Morgan, Bank of America, and Wells Fargo. Would it be wise to swap out either xlv or iyg for something else? Regards, Dave

Jan 05 10:11 AM

[Gary Hickman:]

Thanks for your comments. Actually, there is only one financial ETF in the portfolio- IYG. XLV is health care.


On Jan 05 10:11 AM User 331246 wrote:

> Thankyou for the portfolio idea. It seems reasonable except that
> the holdings include the financial services ishares AND the financial
> services SPDR. Why two ETFs in the financial services space, while
> everything else seems very balanced? Is this an intentional attempt
> to overweight one sector. It would seem to me that there will end
> up being a disproportionate amount of money going into companies
> like JP Morgan, Bank of America, and Wells Fargo. Would it be wise
> to swap out either xlv or iyg for something else? Regards, Dave

Jan 05 10:53 AM

[DRH:]

Sorry Gary, my mistake, got the symbols confused.

If you wouldn't mind continuing the discussion...I have analyzed your HMF, and had a few other comments. You have chosen sector based ETFs representing all the major sectors. Between all your ETFs you basically have every stock in the S&P and then some. However, the return seems to outpace the S&P (at least for the years you were able to track). I believe the key difference is that you are equal weighting each sector. If we look at the S&P it is usually not close to being equal weighted between sectors. At present, SPY has about 15% financial services and less than 4% utilities. Your HMF has 11% everywhere (I'm assuming you would rebalance once every year or two). I would suggest that your HMF is doing better because the sectors where the S&P is weighted over 11% have recently been performing worse than sectors where the S&P is weighted less than 11%. In a nutshell, the equal sector weighting provided a little less exposure to underperforming sectors and more exposure to the better performing sectors.

Don't get me wrong, I think this is still a better approach than just simply putting everthing into SPY or RSP. It certainly results in a more diversified portfolio.

Any thoughts?


On Jan 05 10:53 AM Gary Hickman wrote:

> Thanks for your comments. Actually, there is only one financial ETF
> in the portfolio- IYG. XLV is health care.

Jan 05 07:38 PM

[DonaldRay:]

When I went to the author web site I was expecting another ETF fund site....what a surprise. Thanks for the info....if I do not model it in the coming year then I will have a great ideal for a model.

Jan 05 09:01 PM

[igggy:]

Hm, SPY did not lose 50% last year. I thought the market was down <40% for the year.

Jan 06 02:10 AM

[granger:]

good info, keep it coming. Thanks

Jan 06 03:20 AM

[Gary Hickman:]

DRH,
Your analysis seems valid. My goal was to be very diversified and it has worked so far. As mentioned in my original article, the portfolio is revised slightly once each year. I also made a computational mistake, but the comparisons are still valid. (see my reply to dtv999)


On Jan 05 07:38 PM DRH wrote:

> Sorry Gary, my mistake, got the symbols confused.
>
> If you wouldn't mind continuing the discussion...I have analyzed
> your HMF, and had a few other comments. You have chosen sector based
> ETFs representing all the major sectors. Between all your ETFs you
> basically have every stock in the S&amp;P and then some. However,
> the return seems to outpace the S&amp;P (at least for the years you
> were able to track). I believe the key difference is that you are
> equal weighting each sector. If we look at the S&amp;P it is usually
> not close to being equal weighted between sectors. At present, SPY
> has about 15% financial services and less than 4% utilities. Your
> HMF has 11% everywhere (I'm assuming you would rebalance once every
> year or two). I would suggest that your HMF is doing better because
> the sectors where the S&amp;P is weighted over 11% have recently
> been performing worse than sectors where the S&amp;P is weighted
> less than 11%. In a nutshell, the equal sector weighting provided
> a little less exposure to underperforming sectors and more exposure
> to the better performing sectors.
>
> Don't get me wrong, I think this is still a better approach than
> just simply putting everthing into SPY or RSP. It certainly results
> in a more diversified portfolio.
>
> Any thoughts?

Jan 06 12:24 PM

[Gary Hickman:]

dtv999,
Thanks for pointing out the error. You are correct but fortunately the relative performance comparisons are the same. The corrected numbers are:
2008 5 year average
HMF -33.3% +2.43%
SPY -34.3% - 0.20%
RSP -37.5% -0.75%

On Jan 06 02:10 AM dtv999 wrote:

> Hm, SPY did not lose 50% last year. I thought the market was down
> <40% for the year.

Jan 06 12:29 PM

[oldman:]

thanks for thinking. I would like to see the idea expanded for someone in retirement by added as much as 70% fixed income. Aslo, perhaps some hedge for equity portfolio.

Feb 12 10:42 AM