Does a Four-Asset ETF Portfolio Beat a Three-Asset ETF Portfolio?

by: MyPlanIQ

We are in the midst of a series of articles examining the limits and benefits of tactical asset allocation compared to strategic asset allocation.

We started with the 3 Asset SIB (Simpler Is Better) Portfolio - with one index fund in each asset class. We introduced ESIB3, an extended SIB. An ESIB has multiple funds in each asset class. We saw how an ESIB improved performance over the SIB.

In this article, we compare the ESIB3 with a SIB4. This enables us to quantify the difference between a portfolio with multiple funds in three asset classes against a portfolio with one fund in each of four asset classes.

The ESIB3 is comprised of ten funds. These funds provide access to three major assets: US and foreign equity and fixed income.

Asset Class SIB4 ESIB3
Balanced Fund 0
Fixed Income 2* 5*
Commodity 0
Sector Fund 0
Foreign Equity 1 2
Emerging Market Equity 1 0
US Equity 1 3
Other 0
Total 5 10

*Note that both portfolios have cash (money market) as an additional fund in fixed income.

This compares favorably with the 3 ETF SIB's rating of 12%.

When we compare the historical results:

Performance chart (as of Jan 7, 2011)

click to enlarge

Performance table (as of Jan 7, 2011):

Portfolio Name 1Yr AR 1Yr Sharpe 3Yr AR 3Yr Sharpe 5Yr AR 5Yr Sharpe
Four Core Asset ETF Index Funds Emerging Markets Tactical Asset Allocation Moderate 0% -0% 6% 57% 11% 68%
Four Core Asset ETF Index Funds Emerging Markets Strategic Asset Allocation Moderate 9% 71% 3% 11% 7% 28%
ESIB-3 Tactical Asset Allocation Moderate -0% -2% 2% 24% 5% 44%
ESIB-3 Strategic Asset Allocation Moderate 11% 113% 2% 9% 4% 23%

We note that the ESIB had better returns in 2010 - driven by the strength of US equities - especially in the last quarter of the year. However, as soon as the time horizon stretches out, the additional asset class starts delivering higher returns.

It is critical to have a long term view and not get caught up in short term exuberance.


  • In the short term, SAA beats TAA and the concentration of US equities drives the three asset class portfolio above the four asset class portfolio
  • Once the time horizon performance stretches out, TAA beats SAA and four asset classes beats out three asset classes -- albeit with more funds in each asset class
  • Long term, systematic investment may mean that on the occasional year, you won't have the best returns but, in the long term, it's about the best returns with lowest risk

In the next articles, we will look at how the strategies drive asset ownership and where it is effective and where it is not.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.