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In a previous article I noted that variable annuities have well chosen sub account funds that could lead to portfolios which deliver good returns. We examined the Fidelity Personal Retirement Annuity and broke down its funds.

In summary, the Fidelity Personal Retirement Annuity's plan consists of 56 funds. These funds enable participants to gain exposure to 5 major assets: US Equity, Foreign Equity, REITs, Emerging Market Equity and Fixed Income.

Asset Class

Number of funds

US

13

International

5

Sector

12

Balanced

8

Fixed income

7

Emerging Markets

3

Real estate

1

Target Date

7

We are now going to build a clone plan and see how it performs. We will simplify the choice and not duplicate styles.

US Funds

Style Fidelity ETF

LARGE BLEND

FUSVX

VTI

LARGE GROWTH

FCNTX

VUG

LARGE GROWTH

FSGFX

LARGE GROWTH

FGIOX

LARGE GROWTH

FAGCX

LARGE GROWTH

EQPGX

LARGE VALUE

EQPIX

VTV

LARGE VALUE

FVLIX

MID-CAP BLEND

FASOX

VO

Mid-Cap Growth

FRVIX

IJK

Mid-Cap Growth

FMCCX

MID-CAP VALUE

FVIFX

IJJ

SMALL BLEND

FSCIX

VB

The US funds choice is very wide and here we will not mirror all the choices, rather just one in each style category.

International Funds

Style Fidelity ETF

Foreign Large Blend

FAOIX

EFA

Foreign Large Blend

WPETX

Foreign Large Blend

INLDX

Foreign Large Growth

FCPIX

EFG

Foreign Large Value

IVQDX

EFV

World Stock

FGEBX

VT

Similarly, we will match one style in each category in the international asset class.

Emerging Markets

Style Fidelity ETF

Emerging Markets

FIMKX

EEM

Emerging Markets

LZEMX

VWO

Emerging Markets

MGEMX

We selected two emerging market ETFs to provide an alternative style.

Real Estate

Styles Fidelity ETF

REAL ESTATE

FHEIX

IYR, RWX

Real estate is under represented -- an international REIT would strengthen this asset class. We will add an international REIT fund to the ETFs.

Fixed Income

Style Fidelity ETF

Emerging Markets Bond

MSIEX

EMB

High Yield Bond

FHNIX

HYG

Inflation-Protected Bond

PRRIX

TIP

Intermediate-Term Bond

FBNDX

BND

Intermediate-Term Bond

PTTRX

Cash

CASH

CASH

Short-Term Bond

PTLDX

SHY

The fixed income class is well balanced with good choices and diversification. We match this with the exception of having a second intermediate term bond.

We are not attempting to match any of the balanced funds as there is no opportunity to use these in a standalone portfolio. While the managed funds are available, the fee structure is such that the returns are going to leak into other people's pockets and it will pay you to be on top of your own investments -- either directly or through a professional.

We now compare the returns of the two plans using tactical and asset allocation strategies with a moderate risk portfolio.

Performance chart (as of November 19, 2010):

Performance table (as of November 19, 2010):

The variable annuity portfolios have a clear lead over its ETF clones. The reason for this is the larger number of funds to allow styles rotation.

In fact, to get similar performance using ETFs, you would need to go to one of the richest plans -- provided by TD Ameritrade. The comparison is below.

Performance chart (as of November 19, 2010):

Performance table (as of November 19, 2010):

One important note is that the returns are before fees are assessed. Variable annuities are complex instruments with fees that can be in excess of 2% of the asset base per year. Even so, the historical returns are good and there is the benefit that gains are not taxed.

Looking at the fund design for variable annuities can be instructive in allowing you to build a plan that enables portfolios which give you good risk adjusted returns.

Disclosure: No positions