Questions on My All-ETF Portfolio

Roger Nusbaum submits: A Mr. Len Nikadimo (Seinfeld reference) left a long question on my model ETF portfolio that you can read here.

First, he wants to know where the weightings come from. Yes, my starting point is the sector make up of the S&P 500. I then try to overweight and underweight each sector based on what tends to do well in similar periods as we have now, combined with an attempt to assess current events. I hope that studying both leads to a reasonable forward-looking analysis.

He goes on to ask what would make me change weightings. I recently cut back on energy because it grew to too large of a weight in the portfolio. I still target a slight overweight vs. the S&P 500. My target did not change, but the accounts did, so I scaled back.

Toward the start of June, I reduced the targeted allocation to tech as I have become less and less optimistic about the sector. I am sure I will miss the bottom in that group but with a little exposure I will capture some of a move up, if it comes.

He asks how passive or active the portfolio is. I have written before that I would love to have a portfolio be exactly right for the rest of time but that is not going to be the case. In the way I think an account should be managed, I am ready to make any type of change at any time.

One example of this might be the water theme. I own the PowerShares Water ETF (PHO) personally and for clients. The theme seems clear and obvious to me. But I would sell the ETF at anytime if something convinced me I was wrong about water demand, or I would swap it for a better mousetrap at any time.

Lastly, the reader questions the value of using the S&P 500 as a benchmark. Any criticism is valid and the reader does note that other benchmarks have their flaws too.

Some of the candidates for better benchmark can be difficult to track. Keep in mind, like other PMs I have clients who have some level of interest in knowing how they are doing. One thing I stress here is that the market will get you to where you need to be if you have saved properly. Most people who hire someone like me have saved enough, so a manager just needs to not get in the way too badly.

Someone who has to have better returns will probably not have an account that looks like a broad-based index regardless of what they benchmark.

No portfolio, strategy, benchmark or investor (professional or otherwise) can be perfect. The 30,000 foot concept of the portfolio laid out is fine, even if at the ground level it is wildly flawed.

The point with all of this is that alot can be recreated using ETFs, but not everything (yet?) so don't limit yourself to one product.