Seeking Alpha
Profile| Send Message|
( followers)

ETFs continue to broaden their appeal both in terms of flexibility and low cost. With commission free ETFs, more money stays in the investors pocket rather than disappearing in fees. We have completed the first analysis of TD Ameritrade and Schwab, we now proceed to examine Vanguard and Fidelity – two long term ETF providers.

Vanguard is one of the largest index fund and ETF providers offering commission-free trading to its brokerage clients that use its lineups of 62 proprietary ETFs. Commission free ETFs are also offered by Fidelity and Schwab but Vanguard has the highest number of proprietary funds available.

These funds enable participants to gain exposure to 5 major assets: Us Equity, Foreign Equity, Emerging Market Equity, REITs, Fixed Income.

The list of minor asset classes covered:

Communications: IXP, PTE, DGG, LTL
Consumer Discretionary: RXI, VCR
Consumer Staples: KXI, VDC, PSL, DPN, RHS
Diversified Emerging Mkts: EEM, GMM, PXH, DEM, SCHE
Diversified Pacific/Asia: EPP, VPL, GMF, PAF
Equity Energy: ITE, IXC, IPW, DBE, RYE, DKA
Europe Stock: IEV, VGK, PEF, DEB
Financial: IYF, VFH, IPF, PFI, DRF, RYF
Foreign Large Blend: EFA, VEU, GWL, PFA
Foreign Small/mid Growth: IFSM, VSS, SCHC
Health: IYH, IXJ, VHT, XBI, PBE, DBR, RYH
High Yield Bond: HYG, JNK, PHB
Industrials: IYJ, EXI, VIS
Intermediate Government: IEI, VGIT, ITE
Intermediate-term Bond: AGG, CIU, BIV, BND
Large Blend: IVV, IYY, IWV, VTI, VV, SPY, DLN, RSP, SCHX
Large Growth: IVW, IWZ, JKE, VUG, ELG, QQQQ, RPG, SCHG
Large Value: IVE, IWW, JKF, VTV, ELV, PWV, RPV, SCHV
Long Government: TLT, TLH, IEF, EDV, VGLT, TLO, PLW
Long-term Bond: CLY, LQD, BLV, VCLT
Mid-cap Blend: IJH, IWR, JKG, VO, MDY, EMM, PJG, DON, EZM, MVV
Mid-cap Growth: IJK, IWP, VOT, EMG, PWJ, RFG, UKW
Mid-cap Value: IJJ, IWS, JKI, VOE, EMV, PWP, RFV, UVU
Natural Resources: IYM, IGE, VAW, XLB, XME, PYZ, DBN, RTM, UYM
Real Estate: IYR, ICF, VNQ
Short Government: SHY, SHV, VGSH, PLK, USY
Short-term Bond: CSJ, BSV, VCSH
Small Blend: IJR, IWM, JKJ, VB, DSC, PJM, DES, SAA, UWM, SCHA
Small Growth: IJT, IWO, JKK, VBK, DSG, PWT, RZG, UKK
Small Value: IJS, IWN, JKL, VBR, DSV, PWY, RZV, UVT
Technology: MTK, PTF, DBT, RYT, ROM
Utilities: GII, PUI, DBU, RYU, UPW
World Stock: IOO, VT

As of Oct 22, 2010, this plan investment choice is rated as based on MyPlanIQ Plan Rating methodology that was designed to measure how effective a plan's available investment funds are. It has the following detailed ratings:

Diversification -- Rated as average (57%)
Fund Quality -- Rated as average (60%)
Portfolio Building -- Rated as average (39%)
Overall Rating: average (50%)

The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies (SAA and TAA , both provided by MyPlanIQ). For comparison purposes, we also include the moderate model portfolios of a typical 5 asset SIB (Simpler Is Better) plan.

This SIB plan has the following candidate index funds and their ETFs equivalent:

Us Equity: (SPY or VTI)
Foreign Equity: (EFA or VEU)
Emerging Market Equity: (EEM or VWO)
Reits: (IYR or VNQ or ICF)
Fixed Income: (AGG or BND)

Performance chart (as of Oct 22, 2010)
Vanguard ETF performance versus Five Asset SIB

Performance table (as of Oct 22, 2010)

Portfolio Name

1Yr AR

1Yr Sharpe

3Yr AR

3Yr Sharpe

5Yr AR

5Yr Sharpe

Vanguard 62 Tactical Asset Allocation Moderate

13%

83%

6%

35%

13%

81%

Vanguard 62 Strategic Asset Allocation Moderate

15%

116%

2%

6%

8%

42%

Five Core Asset Index ETF Funds Tactical Asset Allocation Moderate

11%

72%

7%

54%

15%

105%

Five Core Asset Index ETF Funds Strategic Asset Allocation Moderate

14%

103%

3%

13%

9%

41%


Currently, asset classes in Emerging Market Equity (EEM, VWO), REITs (IYR, VNQ, ICF) and Fixed Income (AGG, BND) are doing relatively well. These asset classes are available to Vanguard 62 participants.

Fidelity now makes trading 25 iShares ETFs for free. These ETFs cover complete US equity sizes and styles (large/mid/small caps and growth/blend/value styles). It covers international equity markets well too. In addition, it has good fixed income ETFs. The missing major asset classes are REITs and commodities. We hope those will be made free too. A plan called Fidelity Commission Efficient ETFs extends this plan by including several additional ETFs (which cost $7.95 flat commission per trade).

Fidelity 25 Commission Free ETFss 401K plan consists of 25 funds. These funds enable participants to gain exposure to 4 major assets: Us Equity, Foreign Equity, Emerging Market Equity, Fixed Income. The list of minor asset classes covered:

Diversified Emerging Mkts: EEM, GMM, PXH, DEM, SCHE
Emerging Markets Bond: PCY
Foreign Large Blend: EFA, VEU, GWL, PFA
Foreign Small/mid Value: SCZ
Inflation-protected Bond: TIP
Intermediate-term Bond: AGG, CIU, BIV, BND
Large Blend: IVV, IYY, IWV, VTI, VV, SPY, DLN, RSP, SCHX
Large Growth: IVW, IWZ, JKE, VUG, ELG, QQQQ, RPG, SCHG
Large Value: IVE, IWW, JKF, VTV, ELV, PWV, RPV, SCHV
Long-term Bond: CLY, LQD, BLV, VCLT
Mid-cap Blend: IJH, IWR, JKG, VO, MDY, EMM, PJG, DON, EZM, MVV
Mid-cap Growth: IJK, IWP, VOT, EMG, PWJ, RFG, UKW
Mid-cap Value: IJJ, IWS, JKI, VOE, EMV, PWP, RFV, UVU
Muni National Long: MUB, TFI, PZA, MLN
Small Blend: IJR, IWM, JKJ, VB, DSC, PJM, DES, SAA, UWM, SCHA
Small Growth: IJT, IWO, JKK, VBK, DSG, PWT, RZG, UKK
Small Value: IJS, IWN, JKL, VBR, DSV, PWY, RZV, UVT
World Stock: IOO, VT

As of Oct 22, 2010, this plan investment choice is rated as based on MyPlanIQ Plan Rating methodology that was designed to measure how effective a plan's available investment funds are.

It has the following detailed ratings:

Diversification -- Rated as average (63%)
Fund Quality -- Rated as poor (9%)
Portfolio Building -- Rated as below average (14%)
Overall Rating: below average (27%)

The chart and table below show the historical performance of moderate model portfolios employing strategic and tactical asset allocation strategies (SAA and TAA , both provided by MyPlanIQ). For comparison purposes, we also include the moderate model portfolios of a typical 4 asset SIB (Simpler Is Better) plan.

This SIB plan has the following candidate index funds and their ETFs equivalent:

Us Equity: (SPY or VTI)
Foreign Equity: (EFA or VEU)
Emerging Market Equity: (EEM or VWO)
Fixed Income: (AGG or BND)

Performance chart (as of Oct 22, 2010)
Fidelity 25 ETF Performance compared against a Four Asset SIB

Performance table (as of Oct 22, 2010)

Portfolio Name

1Yr AR

1Yr Sharpe

3Yr AR

3Yr Sharpe

5Yr AR

5Yr Sharpe

Fidelity 25 Commission Free ETFs Tactical Asset Allocation Moderate

3%

24%

3%

19%

11%

71%

Fidelity 25 Commission Free ETFs Strategic Asset Allocation Moderate

10%

68%

-0%

-3%

7%

28%

Four Core Asset ETF Index Funds Emerging Markets Tactical Asset Allocation Moderate

2%

14%

6%

47%

14%

90%

Four Core Asset ETF Index Funds Emerging Markets Strategic Asset Allocation Moderate

10%

75%

2%

5%

8%

37%

Currently, asset classes in Foreign Equity (EFA, VEU) , Emerging Market Equity (EEM, VWO) and Fixed Income (AGG, BND) are doing relatively well. These asset classes are available to Fidelity 25 Commission Free ETF participants.

To summarize:

  • Vanguard 62 Commission Free ETF plan participants have seen returns in the 8-13% range for a moderate portfolio with strategic and tactical asset allocation based on having a five asset class portfolio.

  • Fidelity 25 Commission Free ETF plan participants have seen returns in the 7-11% range for a moderate portfolio with strategic and tactical asset allocation based on having a five asset class portfolio.

Given the greater number and greater diversification, the Vanguard plan would be the one most likely to continue to deliver better risk adjusted returns and so is declared the winner and moves on to the final round.

Disclosure: No positions

Source: Top Tier ETF Broker Playoffs II